One of the first things I am often asked by a prospective client is what our fees are. This is often before there has even been a discussion about what the client’s needs are, or the kind of help we provide as financial advisors.
Fees have become the primary focus of clients when choosing one of the most important advisors in their life.
We thought it would be helpful to clear up the confusion about how different wealth managers charge for their services, the different types of service a client can receive from a wealth manager, and how to decide what is best for you personally.
How are fees charged?
There are several different ways financial advisors charge clients for service. A firm can be fee-only, fee-based, or commission based. How a firm charges clients also dictates what responsibility they take for guiding a client and the services they provide.
When an advisor is Fee-only it means that the only compensation the firm receives is a fee for service. They do not receive commission from selling products. The fee charged is often a percentage of the assets a firm manages for a client. It may also be charged as a retainer or as an hourly charge. All services the advisor provides, from financial planning to wealth management, are included in this one fee. This model of payment allows for advisors to choose the best investments for a client rather than put their own personal gain first, since no compensation is tied to a transaction.
Fee-only financial planners are Registered Investment Advisors with a fiduciary responsibility to act in a client’s best interest. While acting in a client’s best interest might seem like an obvious quality for a financial advisor, fee-based and commission based advisors are not required to be fiduciaries. Make sure to ask your advisor if they are a fiduciary.
Another fee option is called Fee-based. This is a combination of fee-only and commission based. It means that some transactions in the firm allow for commission. The firm may charge a fee as a percentage of assets as explained above, but may also receive commission when products such as insurance policies are sold to clients. This model opens the firm and the advisor up to potential conflict of interest. While it is our belief that most advisors at fee-based firms put their client interests first, human nature can get the best of even well meaning folks.
This brings us to the Commission-based fee option. Compensation by way of commission is quite common among brokerage houses where financial advisors are compensated by the commission for the products they sell and the transactions they make. Because their compensation is tied to commission, it opens the advisor up to conflict of interest. In addition, commission based advisors are not required to be fiduciaries, which means client’s best interests are not required to be ahead of that of the advisor.
What services do you get for your fee?
If an advisor is a fee-only registered investment advisor, as is WealthChoice, a client’s fee covers all financial planning and investment management necessary to manage a client’s financial life. A client may receive a comprehensive financial plan that is customized for them based on their personal situation and goals. The advisor may collaborate and meet with other trusted advisors for the client such as accountants and attorneys. All ongoing financial planning and investment management provided by the advisor must be included in the fee.
If an advisor is commission based, in most cases there is either no financial planning provided, or cursory planning. The service tends to be focused on investment management, which may or may not be tied to a client’s personal goals, and may or may not provide customized investment solutions.
How do you decide what is best for you?
What is the best guidance worth to you? If you could reach your financial goals and live your ideal life, what would that be worth to you? When you are sick and visit a doctor, do you choose the cheapest doctor, or the best doctor? Life planning is very much the same. Choose your advisor as if your life depended on it.
Fees are most definitely an important consideration when choosing a financial advisor, and we cannot say enough about the transparency and conflict free model of fee-only firms who are fiduciaries. However, not all fee-only firms are equal. Think about your goals, your needs, and your ideal life and ask advisors you interview about their planning skills and the customized solutions they create to help people like you reach their goals. Choose an advisor you can trust and who you know has your best interests at heart, and then focus on living your life knowing you have a great team in place, worth the fee.
WealthChoice is a fee-only financial planning and investment management firm. We believe that customized financial life planning is essential to helping our clients live their ideal life. Let us know if you have questions about how we help our clients live better.
