What Is a Fee-Only Financial Advisor? Why Does It Really Matter?
Generation X’ers in Greeneville, Tennessee are in their peak earning years. The oldest, born between 1967 and 1982, are getting close to starting the decade before they reach retirement age. Their financial position and close proximity to retirement age means they may be more inclined to start working with a financial advisor in the near future. But it is critically important to choose the right advisor.
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What does the right one mean? It means their fees are reasonable and their advice is prudent and sensible based on today’s environment and their knowledge of your goals and risk tolerance. It means they must put your financial well-being ahead of their own. We know this sounds obvious, but there are certain risks that you should know about before you select an advisor who will influence your financial decisions. It stands to reason, all financial advisors are not the same and you should know the key differences.
Your best choice is to select a fee-only firm with advisors who are acknowledged financial fiduciaries, such as Sapiat Asset Management LLC located in Greeneville.
Read this article to learn more about how you can select the best financial advisor.
Financial Advisor Compensation
Financial advisors can charge several types of fees for their advice and services.
Let’s take a closer look at each of them.
Asset-based fees are a % of the market value of assets that are invested for you by your advisor.
Fixed fees are one-time fees that usually cover the cost of a specific service – for example the cost of producing a financial plan.
Hourly fees are just like they sound. You pay an hourly fee for the knowledge, advice, and services of your financial advisor. This is the same as the way you pay your CPA or attorney.
Subscription fees may vary, but most of the time you are paying a fixed annual fee that covers the cost of recurring services – for example, annual planning and asset management services.
Who Pays the Fee?
You are the only source of payment when your advisor is compensated with a fee. This is the same way you compensate any other professional (CPA, attorney) you depend on for specialized knowledge, advice, and services.
No third party compensates your advisor for the sale of financial products. A third party might be a broker/dealer, mutual fund family, or insurance company.
What Does Fee-Only Mean?
You should be very cautious when financial advisors claim to be fee-only professionals. Many of them are paid with fees and commissions, which creates inherent conflicts of interest.
Fee-only financial advisors do not accept any type of commission, revenue sharing, transaction charges or other forms of compensation that may or may not be disclosed to their clients.
Their only method of compensation is one or more of the various types of fees.
What About Commission Compensation?
Companies pay commissions to advisors to incentivize them to sell their products. When advisors are compensated with commission, you might ask who they work for? You or the companies that pay them to sell their products? It stands to reason the advisors work for the companies that pay them.
There is also a little known fact that lower quality product companies pay bigger commissions than higher quality product companies. They have to pay bigger commissions to motivate advisors to sell their products – a core conflict of interest.
At Sapiat Asset Management, we pride ourselves on being the first fee-only advisor in Greene County. We believe in putting our client’s best interests first – not our own. Our fees are transparent and easy to understand. We offer our clients an “all-in” fee which is a percentage of their assets, hourly fees, or flat fees for specific projects. We don’t receive any form of commission, so we can provide objective advice that works best for our clients. We have one role at Sapiat – help our clients achieve their financial goals for the least amount of risk and expense.
How Advisors Obscure Their Compensation
There are some advisors who work strictly on commission. Most of the time they are called stockbrokers, agents, or registered representatives. A lot of their firms even refer to them as producers. The advisors with the biggest offices usually produce the largest amounts of commission for their firms.
Another point of confusion is how these advisors refer to themselves. In other words, they do not call themselves stockbrokers because it sounds too much like a salesperson. Instead, they call themselves financial advisors even though they are compensated with commissions. Another point of confusion for many investors.
Many salespeople have structured their business so they can be compensated with fees and/or commissions. Whatever makes them the most money. They may refer to their compensation arrangement as fee-based, which sounds a lot like fee-only, but is dramatically different.
There are fee-only advisors and fee-based advisors and it pays for investors to know the difference – fee-only structures and fee-based structures are not the same. How do you know the difference? Require full disclosure for all of the advisors’ compensation, who pays the advisors, and what advisor services are covered by the compensation.
The Benefits of a Fiduciary
Fee-only advisors also have another unique characteristic. Based on their registrations (Registered Investment Advisor, Investment Advisor Representative), they are financial fiduciaries who are held to the highest ethical standard in the financial service industry. They are required to always put their clients’ financial interests ahead of their own (fiduciaries must operate with your best interests in mind).
A word of caution. Keep in mind there are hybrid advisors who work for fees and commissions. They are fiduciaries when they provide advice and services for fees. They are not fiduciaries when they sell investment products for commission. This is an inherent conflict of interest that is very confusing to most investors. In fact, they may not even know this conflict exists.
If your current advisor is not a fiduciary, you should know these advisors are held to much lower ethical standards known as suitability. “Suitability” means advisors make suitable recommendations that are based on a very basic knowledge of their clients’ goals, circumstances, concerns, and tolerances for risk. Unfortunately, this standard is extremely vague because it is subject to interpretation. That is, five advisors could provide five different recommendations and they could all be deemed suitable.
A new SEC ruling called Regulation Best Interest.goes into effect on 6/30/2020. In addition to the “suitability standard” that brokers must adhere to FINRA and the SEC are now requiring a “Best interest” standard of conduct. This, in some ways, will blur the distinction between a real fiduciary and an advisor who is licensed with a broker/dealer and is paid with commissions even more. This is exactly what Wall Street had in mind when it spent millions on lobbyists who influenced the decisions of politicians and bureaucrats who oversee these regulatory agencies.
That is why it will be even more important to ask advisors to document in writing their licensing, method(s) of compensation, and fiduciary status.
When choosing a financial advisor, you may want to look for three more characteristics that impact your relationships with advisors and the quality of their advice and services.
First, always choose a CERTIFIED FINANCIAL PLANNER™ professional. CFP®s are trained in all areas of financial planning. They must pass rigorous exams to obtain this designation. They must have several years of experience. They must practice disclosure when they provide financial advice and services.
Second, choose someone who knows the Greeneville area, and not someone who may be accessible online but is located hundreds of miles away. Your location has a big impact on your financial life and decision-making. For example, real estate, taxes, and other professionals you depend on are local.
Third, your financial planner should work with people whose assets and requirements are similar to yours. You want an advisor who has years of experience working with clients just like you.
At Sapiat Asset Management, we use a unique, personalized process to identify the needs of our clients. Our knowledge of your financial situation is a big part of the foundation that drives our relationship with you. Contact us today for a complimentary consultation.