In contrast with commission based financial advisors are the fee only advisors.
Today we will look at the pros and cons of this group.
As a reminder, I provide fee only service in my business. So read my analysis with that in mind.
Fee Based Financial Advisors
As you might expect, a fee based advisor charges fees directly to clients.
Fees may be charged a few different ways.
They may be based on an hourly rate. Fees may be charged for a specific service, regardless of time involved. Or they could involve a combination of the two.
For example, an advisor may charge $200 per hour for wealth management advice. The advisor may also provide a quote of $2000 to prepare a comprehensive investment plan after estimating the work involved for a client. In areas of uncertainty as to effort required, the advisor may quote $1500 for a retirement plan, plus $150 per hour for any time exceeding 20 hours. Or, perhaps $200 per hour up to a maximum of $2000 for a personal budget.
(Hopefully) Unbiased Advice
In this era of Bernie Madoffs, you would be crazy to blindly assume that your financial advisor has your best interests at heart. I strongly recommend that you perform proper due diligence on any professionals – investment or otherwise – before developing relationships. And, even then, be careful.
However, I believe that on average there is a greater probability that a fee only advisor will provide unbiased advice than one whose income is derived from selling products.
Providing financial expertise is the job of the fee only advisor.
They do not earn income by selling products. They make their money by their knowledge. If they provide quality and perceived added-value for their clients, they will grow their practice.
If you undertake adequate due diligence, you should be able to find an advisor that is highly qualified.
We will look at how to assess a potential advisor later.
A big advantage of fee based advisors is that they usually also provide non-investment specific services.
If you want more comprehensive wealth management or financial planning support, a fee based advisor will be preferable.
Comprehensive advice might include estate and succession planning, tax support, and sophisticated wealth management.
Of course, skill sets differ between advisors, so find a match that serves your needs.
First, by having to directly pay your advisor, you may feel the expense more than one hidden in a product commission or annual operating expense.
Writing someone a cheque for $2000 may make a more mental impact than paying an extra 25 basis points annually on a mutual fund.
Second, fee only advisors can be expensive.
Like other professions, rates will differ between advisors.
Those advisors with better reputations will charge more than lesser known advisors. The same is true for technical skills, experience, etc. The “better” advisor will charge more.
For an investor with relatively simple needs, the direct fees of a fee only advisor may approximate or be higher than a commission based advisor for a similar service level.
And for small investors, a fee only advisor will likely be more expensive than in using a commission based advisor.
While many clients desire more financial assistance than simply investment advice, it comes at a price.
These additional services can be quite lucrative for fee based advisors. So if you use a fee based planner, be wary of costs for non-investment related advice.
A Caveat on Costs
While you want to be prudent in spending money, you get what you pay for in life.
Try not to take shortcuts. You and I both know many horror stories of the person that “saved” on legal, tax, accounting, medical, etc. advice and ended up paying for it ten-fold over time.
Combination Commission and Fee Based Advisors
Please be aware that some advisors charge fees to their clients, yet also accept commissions or other income on product sales or business arrangements with third parties.
The pros and cons are still applicable as relates to each.
In many professional organizations, advisors are required to inform clients of any relationships where they receive money from third parties. This is also true with disclosing potential conflicts of interest, something that may be present if they are both charging fees to clients and accepting commissions or retrocessions from investment issuers.
You should also watch out for referral fees paid to advisors when directing business elsewhere. For example, if your advisor, fee based or commission, does not perform tax work but sends you to someone for assistance. Often, there is some kind of monetary relationship involved for referral business of this nature. So be on guard.
To be safe, always confirm in writing with a potential advisor as to how they are compensated.
A fee based advisor may be preferable if you meet any of the following criteria: have a sizeable investment portfolio; want a more comprehensive and long-term financial plan; have needs that impact your financial life, but are outside traditional financial investments (e.g. owner-managed business; rental properties; tax shelters).
A fee based advisor may also be preferable if you have concerns about advisor objectivity.
In the short run, you may pay more for a fee based advisor. But, if you find a competent professional to work with, you may save money in the long run.