< Blog
Hiring an Advisor

Why Hire a Fee-Only Financial Advisor?

You’ve decided to hire a financial advisor - now the search begins.  So what do you do?  When I Google ‘financial advisor near me,’ 670,000,000 results come up.  Plus (or is it ‘including’?) four paid advertisements. How about asking a friend or family member for who they use?  At the end of the day, you still have to take time to vet advisors out yourself.  Because let’s face it, you don’t want to hire just anyone.  Finding someone you can trust, relate to, and understand is extremely important.  


COMPENSATION AND PAYMENT OF A FINANCIAL ADVISOR

The next stop on this train is all about money in (to the advisor) and money out (of your pocket).  It’s important to know how the financial professional you work with is compensated for the services they provide to their clients.  This can range from commissions, assets under management, a flat fee, or an ongoing fee.  Once you understand how they are compensated, find out what exactly YOU would pay.  



WHAT MAKES SOMEONE FEE-ONLY

A fee-only financial advisor is compensated directly for their advice, plan implementation, and management of assets.  Fee-only financial advisors that follow the fiduciary standard ensure that they are acting in the best interest of their clients.  You may assume that a financial advisor will always make recommendations based on your best interest, but this is not always the case.  Many financial advisors make recommendations based on suitability.  What’s the difference?  The suitability requirement allows the financial advisor to make recommendations based on criteria such as your net worth, income, and investment experience.  

Let’s take a look at a hypothetical example...

Your net worth is $1,000,000

Your annual income is $150,000

Your investment experience is 10+ years

Based on these criteria you may be eligible for a certain investment product (also known as a structured product) that your financial advisor says has higher risk with greater upside potential.  Your financial advisor presents this product to you and recommends you allocate a percentage of your portfolio to it.  You agree because your financial advisor has to recommend what is best for you, right?

Wrong.  Your financial advisor is only required to abide by the suitability standard, therefore,  they can make this recommendation because your information on paper checked all the boxes (such as net worth, income, and investment experience).  They do not have to prove to anyone, including you, that it is in your best interest.  Simply that it is suitable.  Confusing, isn’t it?


SUITABILITY STANDARD VS FIDUCIARY STANDARD

What is the suitability standard anyways?  Pulling directly from FINRA: “The rule states that the customer’s investment profile “includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs [and] risk tolerance,” among other information. A broker’s “recommendation,” which is based on the facts and circumstances of a particular case, is the triggering event for application of the rule.”  Essentially, fiduciaries must always put their clients’ interests above their own.  Those who do not follow that standard can put their and/or the company’s interests first as long as the suitability requirements are all checked.

Let’s take a look at another hypothetical example…

You are in your mid 30’s and your financial advisor says that you should consider additional life insurance coverage.  Rather than purchasing affordable term life insurance, your financial advisor introduces you to a fancy life insurance product with all the bells and whistles.  Now the conversation goes from talking about life insurance and protecting your loved ones to speaking more about the investment vehicle within the insurance policy that has growth and savings elements all wrapped in.  Wait, what?? 

Run.

The inherent conflict of interest is this… commission-based financial advisors have an incentive to sell you products.  That’s how they put food on the table.  They aren’t necessarily bad, dishonest, or unworthy of your business.  It’s simply the nature of the business they choose to work for or operate in and it’s up to you as a consumer to be knowledgeable going into that situation.  

So, while your situation may be suitable to invest in a product of some kind, it doesn’t necessarily mean your financial advisor is recommending what is in your best interest.  Speaking from professional experience, it is much more difficult to prove to regulators that something is in your best interest than it is to show it’s suitable for you.  The fiduciary standard is the highest standard and provides the greatest consumer protection.  

By hiring a fee-only financial advisor you eliminate conflicts of interest existing within the recommendations provided to you.  You now know a fee-only financial advisor that abides by the fiduciary standard will only make recommendations that are in your best interest.  Fee-only financial advisors are transparent in terms of the cost associated with the services they provide to you.  Clients know exactly how their financial advisors are being compensated (assets under management, flat fee, or ongoing fee).  This means the client holds their financial professional to a higher standard because of the transparency that takes place.  If you are currently working with a financial advisor that doesn’t have your best interest at the forefront of what they do, consider a fee-only financial advisor that is willing to provide an unbiased second opinion.

Fee-only financial advisors are becoming popular among consumers due to the request for greater transparency in the profession.  If you are interested in finding a fee-only financial advisor check out these independent networks that can connect you to someone that fits your needs:

NAPFA

Fee-Only Network

XY Planning Network

We are always happy to provide you with a second (or first) opinion on what financial planning should look like for you.  We are based in Rochester, MN, and work virtually with clients across the country. Connect with us today to learn more.

Disclaimer:  This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.

Dan Slagle
Founder, Fyooz Financial
Share:

Related Articles

Start your financial
journey now

Our goal is to help you understand how your asset allocation, tax allocation, and investment selections impact your financial goals. We actively manage our clients' investments.
Schedule a Free Consultation