By: Colleen Weber
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By Colleen Weber, CFP®, CPA
If you’re currently looking for a new financial advisor, Google has likely already informed you that there are different subsections of advisors based on how they are compensated. There are fee-only financial advisors, fee-based financial advisors, and commission-based financial advisors. So what exactly is the difference?
A critical component to making the right choice for whom you choose to oversee your long-term wealth management strategy is understanding the compensation structure of each financial advisor. And, as it turns out, there is a big difference between these three types of financial advisors.
My firm is a fee-only wealth management company, focused on providing wealth management solutions to individuals nearing retirement and thinking about the next step in their lives. We firmly believe that being a fee-only wealth management company provides clients with distinct advantages, as we offer advice and strategies that are right for our clients—not based on commission. The fee-only financial advisor compensation model is the only compensation structure for financial advisors that obligates the advisor to put their clients’ needs before their own.
Below I have outlined the different types of compensation for financial advisors and highlighted the benefits of being a fee-only financial wealth management company.
Compensation Structure For Financial Advisors
Financial advisors typically fall into one of three categories: fee-only financial advisors, fee-based financial advisors, and commission-based financial advisors. As the name suggests, fee-only financial advisors are compensated through a predetermined fee, while commission-based and fee-based financial advisors are compensated at least partly through commissions earned from the selling of certain products and through certain financial transactions.
There is also a distinct difference between a fee-only financial advisor and a fee-based financial advisor. Fee-only financial advisors receive their compensation from fees paid from the client to the advisor. Additionally, fee-only advisors have traditionally been held to a fiduciary duty to protect their clients’ interests before their own.
Fiduciary duty sounds like a good thing, but what exactly does it mean? Simply put, a financial advisor who has fiduciary duty to his client has a legal responsibility to put the interests of his client before his own. This means that if your financial advisor is a fiduciary, he must act solely in your best interests or face legal consequences. A fiduciary must live up to clients’ trust in them through transparency and minimizing conflicts of interest.
Fee-based financial advisors are generally compensated by both commissions on the sale of certain products and fees for their advice, which typically includes guidance on which financial product the client should buy from them. Some critics have noted that both fee-based and commission-based financial advisors have an inherent conflict of interest because these types of financial advisors work on commission and are predisposed to promote products from which they will benefit financially.
The Benefits Of Working With A Fee-Only Financial Advisor
Fee-only advisors provide clients with unbiased and comprehensive financial advice that solely benefits the client. In addition, they are required to conduct their business under a fiduciary duty, and many of them also carry professional designations that hold them to strict professional standards.
While any commission-based financial advisor will have a strong impetus to sell clients on products or financial services that will benefit the advisor, the fee-only compensation structure allows the advisor to operate with more transparency and recommend products or services with no bias.
I’m Here To Help
You’ve already decided that it’s better to consult a professional than to DIY the plan for your financial future. And you want your financial advisor to put your interests before their own (which isn’t guaranteed with all advisors!). Well, I specialize in doing just that, and am well versed in creating unbiased and solid wealth strategies for my clients. If you’re interested in finding out more about how I can help you, book a free introductory meeting online!
Colleen Weber is a fee-only financial advisor, CERTIFIED FINANCIAL PLANNER™ professional, and CPA with more than 15 years of financial planning experience. Providing comprehensive financial planning and wealth management, she specializes in serving clients nearing retirement, retirees, busy professionals, and women. She is passionate about developing financial plans that save clients on taxes, and investment strategies that help them pursue their goals. Learn more about Colleen by connecting with her on LinkedIn or booking a complimentary phone call meeting.