Financial planning services are often marketed using qualifying terms such as fee-only, fee-based, or commission based. These terms explain the way your financial planner is charging you and being compensated. The landscape of how you pay your advisor has dramatically shifted over the past few decades. Fee transparency is driving many consumers today to prefer to work with a financial planner that offers a fee-only financial planning service. This type of offering is a popular choice for many consumers due to the fee-only compensation structure requiring that the advisor/planner is only paid directly from you, instead of indirectly from product sale commissions. In this blog, we’ll explore what fee-only financial planning is, how it works, its pros and cons, and how it compares to other types of financial planning services.
What Is Financial Planning?
Financial planning is the ongoing experience of creating a financial strategy to manage your money in the best way possible to achieve your goals and dreams. The planning process involves assessing your current financial situation, setting objectives, and developing a plan or list of action items needed to reach those goals. The CFP® Board (CERTIFIED FINANCIAL PLANNER™) outlines that the following topics are central to the financial planning experience: Cash Flow & Debt Management, Investment Planning, Retirement Savings & Income Planning, Tax & Estate Planning, Risk Management & Insurance Planning.
What Is Fee-Only Financial Planning?
Fee-only financial planning is a financial advisory service where the advisor is compensated solely by the client, without receiving commissions or incentives from financial product sales. The fee-only compensation model aims to minimize conflicts of interest and increases the likelihood that the advisor’s recommendations are aligned with the client’s best interests. Fee-only financial planners typically charge an hourly rate, a flat fee or retainer, or a percentage of assets under management (AUM) deducted from investment accounts being managed by that advisor. Fee-only financial advisors often offer both financial planning and investment management services.
How Fee-Only Financial Planning Works
In a fee-only financial planning service, the client pays the advisor directly for their advice. This can be done in several ways:
- Hourly Fees: The client pays for the advisor’s time on an hourly basis. This is often used for specific financial planning tasks or consultations.
- Flat Fees or Retainer: The client pays a fixed amount for a comprehensive financial plan or a recurring amount for ongoing financial planning services. The frequency of the retainer is often annually, quarterly, or monthly depending on the service model of the financial advisor.
- Percentage of AUM (Assets Under Management): The client pays the advisor a percentage of their investment assets under the advisor’s management. The fee is usually deducted on a quarterly basis out of the investment accounts being managed to compensate the advisor for ongoing planning advice and investment management services.
Fee-Only Financial Planning Pros and Cons
Pros
- Transparency: Clients know exactly how their advisor is getting paid and that they are paying directly for advice instead of purchasing a product where a third party would compensate the advisor.
- Less Conflicts of Interest: Because fee-only financial planners do not receive commissions, they are often more likely to recommend financial products and strategies that are genuinely in the client’s best interests. Conflicts of interest are not completely eliminated however, as advisors who manage investments can be biased against recommendations that would cause the investment account balances to drop dramatically.
- Fiduciary Responsibility: Fee-only financial advisors often act as fiduciaries, meaning they are legally obligated to prioritize the client’s interests over their own.
Cons
- Cost: Fee-only services can be expensive, especially for clients who aren’t used to paying out of pocket for financial advice.
- Accessibility: Some fee-only advisors have high minimum investment asset requirements, making their services less accessible to all clients.
- Less of a One-Stop-Shop: Because fee-only financial advisors don’t receive commissions for selling products, clients will often need to have financial products including insurance policies and loan products held at separate financial institutions outside of the practice of their financial planner.
Comparing Fee-Only and Other Types of Financial Planners
Here is a comparison table to illustrate the differences between fee-only, fee-based, commission-based financial advisors:
Feature |
Fee-Only Planners |
Fee-Based Planners |
Commission-Based Advisors |
Advisor Compensation |
Hourly rate, flat fee or Retainer, or percentage of AUM (Assets Under Management) | Combination of fees and commissions | Commissions from product sales |
Conflicts of Interest |
Minimal and usually related to investment decisions if the advisor offers an AUM (Assets Under Management) pricing model | Potential conflicts surrounding investment decisions as well as recommendations involving insurance and loan products due to the ability to receive commissions | Higher likelihood of conflicted advice due to the full reliance on product sales as a method of generating income |
Fiduciary Responsibility |
Primarily act as fiduciaries | May or may not act as fiduciaries (Commonly referred to as the dual-hat approach) | Typically do not act as fiduciaries |
Services Commonly Offered |
Financial Planning, Investment Management | Financial Planning, Investment Management, Insurance Product Sales, Loan Product Sales, etc | Investment Product Sales, Insurance Product Sales, Loan Product Sales, etc |
Transparency |
High | Moderate | Low |
Typical Fees |
$150-$500/hour, $1,000-$12,000 flat fee or annual retainer, or 0.5%-1.5% AUM (Assets Under Management) annually | Similar fees as the fee-only category however the advisor also receives commissions for sales of other financial products including insurances and loans. | The client does not pay the advisor directly. The advisor is entirely paid by the companies whose products they sell. This often means the client is paying internal product fees that indirectly compensate the advisor. |
What Do Fee-Only Financial Planners Typically Charge?
The cost of fee-only financial planning varies based on the advisor’s experience, location, and the complexity and range of the services provided. Common cost ranges include:
- Hourly Fees: $150 to $500 per hour
- Flat Fees or Retainer: $1,000 to $12,000 annually for a comprehensive financial planning engagement. In some cases these numbers are divided by 12 and changed monthly or by 4 and charged quarterly.
- Percentage of AUM: 0.5% to 1.5% of assets under management annually. Usually the percentage charged drops at certain breakpoints as the account balances get larger.
Sometimes fee-only planners will charge a combination of the above listed items. The important concept to note is that Fee-only financial advisors are compensated directly by their clients, which helps to minimize conflicts of interest with the advice that they provide.
How to Choose a Fee-Only Financial Planner
Choosing the right fee-only financial planner is similar to hiring any other qualified service professional:
- Credentials: Look for advisors with reputable certifications such as CFP® designation (CERTIFIED FINANCIAL PLANNER™).
- Membership Organizations: Look for advisors who belong to organizations that only allow membership for fee-only financial planners including NAPFA (National Association of Personal Financial Advisors), the XY Planning Network, the Garrett Planning Network.
- Experience: Consider the advisor’s experience and expertise in dealing with clients in similar financial situations. Does the advisor specialize in helping clients in your line of work, stage of life, or level of complexity?
- Services Offered: Ensure the advisor provides the specific services you need. For example, if you aren’t looking for help with investment management services, then you may want to find an advisor that offers “advice-only” financial planning.
- Client Reviews: Check reviews and testimonials from current or former clients where possible. Regulation has recently passed allowing advisors in certain states to provide client testimonials and reviews. Unfortunately this is not always the case as some states in the US still ban this practice.
Make the Most with Your Money by Choosing Stage Ready Financial Planning for Fee-Only Financial Planning
At Stage Ready Financial Planning, we specialize in fee-only financial planning for individuals and couples over age 50 in Dayton & Southwest, Ohio create a clear and easy to understand plan so that our clients can retire with confidence and afford their dream lifestyle. Schedule your introductory call today!
FAQs
Is a fee-based financial planner worth it?
Working with a fee-based financial planner can be worth the investment if they provide valuable advice that aligns with your financial goals. It’s important to understand how your fee-based financial advisor integrates product sales into their planning recommendations. Because fee-based financial advisors can charge direct planning fees and get paid by selling you products, you should pay attention to situations where the planning advice recommends the purchase of large insurance policies or products that the advisor can sell. It’s very possible that these recommendations are legitimate, but be sure to ask lots of questions to understand the assumptions used in developing the advice.
Is hiring a CFP® professional worth it?
Looking to hire a CFP® professional can be a great starting point for researching who to hire, due to their extensive training, rigorous certification process, and commitment to acting in their clients’ best interests. Because the CFP® Board doesn’t mandate how financial planners implement advice and services, it’s important to consider many other factors when looking to hire your advisor including their years of experience, specialization, services offered, and client reviews or testimonials where possible.