Why It Matters How Your Advisor Gets Compensated

I get asked a lot of times what is a “fee-only” advisor and why should I work with one?  Let me answer these frequent questions.  First, a fee-only financial advisor’s compensation comes directly from the client.  The advisor does not receive any commissions or referral fees from selling financial products, such as annuities, insurance and investments.  A fee-only advisor may receive compensation from assets under management, retainer fees or an hourly rate.  I focus the majority of my business on retainer fees, however, I do some minimal pay per hour projects.

For information sake, a “fee-based” advisor receives compensation from both charging a fee for completing a financial plan and also selling you financial products that come about as a result of the planning recommendations in the plan.  I call these folks “double dippers.”  Many times the financial plan is offered at severe discount.  Their real profit comes from selling you the products they recommend.  They beleive if they charge you a fee for their advice you are more likely to implement their advice.  Some “fee-based” planners criticize “fee-only” advisors because they say “fee-only” advisors offer planning without implementation.

A commission-only advisor makes his compensation strictly from selling you financial products that have a load or commission attached to them.  In my humble opinion, I tend to trust “commission-only” folks more than “fee-based” advisors because you know they are only getting paid from what you buy from them and they do not have any ulterior motive in offering you a “plan”.

I personally believe that each of these advisors have a place in the financial world, however, the main thing I ask from each one of them is to disclose to the client how they are going to get paid and allow the client to make the decision.

The #1 reason why you should work with a fee-only advisor is they can give you “objective, unbiased” financial advice free of the potential conflict of product sales.  Yes, a fee-only advisor is still selling a product to you. The product he is selling is an education and trustworthy advice.

When it comes to you and your money follow this common rule:

“Know how your advisor gets paid and you will likely find out the quality of his advice!”

About the author

Kevin F. Jacobs, CFP®, EA

Kevin Jacobs, the founder of Step By Step Financial, LLC, has been a recognized CFP® practitioner since 2008 and has been in the financial services industry since 2005. As an Enrolled Agent (EA), Kevin is also licensed to practice before the IRS. Before 2005, he served as a youth director in Memphis, TN. Kevin and his wife, Donella, have seven children (5 boys and 2 girls). They are active at their church and Kevin is also very involved in the community of Broken Arrow.

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