The profession of financial planning has really only been around since the 1960s and 1970s. This is quite new when compared with other professions like accounting or medicine. The field is still striving to define exactly what we mean by the term financial planning.
What we currently call financial planning largely grew out of insurance and investment sales. But over time, many consumers have realized they don’t want a commissioned salesperson to help them make some of the most consequential decisions of their lives. When making decisions such as how much to spend on a house, what kind of insurance they need, how to invest, or when it’s okay to retire, they wanted a person to offer advice, not products.
This has led to the rise of fee-only financial planning. A fee-only planner never receives any commissions. Instead, she is paid directly by the client. Here are a few crucial advantages to this method of compensation.
1. Fewer conflicts of interest
The most frequently cited reason for choosing a fee-only planner is to avoid the conflict of interest that’s inherent in commission-compensated planning. If the advisor only gets paid if they sell you a product, it’s much more difficult for the advisor to recommend solutions that don’t require such a sale.
Fee-only financial planners are paid directly by the clients they serve. The planner doesn’t have to get you to buy an investment or an insurance policy just to get paid.
Financial planning is rife with examples of inappropriate product sales, from unnecessarily expensive annuities in IRAs to the thinly veiled commission-seeking by selling whole life insurance and calling it “college planning.”
Let’s be clear: you can absolutely find financial planners who are paid solely by commissions who genuinely do have their clients’ best interests at heart.
But for many consumers, the nagging question with commission-compensated planning remains: “Is this sale in my best interest or my advisor’s?” The fee-only approach avoids this question. Regardless of whether the client decides to buy any financial product, the advisor’s fee doesn’t change.
The fee-only model reduces conflicts of interest, but no compensation model eliminates all of them. Be mindful of them and don’t hesitate to ask your advisor about them—a responsible professional won’t be offended by your questions about conflicts of interest.
2. Better alignment with the fiduciary standard of care
Over the past few years, we have seen a sharp increase in the number of clients who demand advisors who follow a fiduciary standard of care, which requires the advisor to put their clients’ interests before their own.
If your advisor holds the CERTIFIED FINANCIAL PLANNER™ designation, they have committed themselves to a fiduciary standard regardless of how they’re compensated. Still, commission compensation can make it difficult for clients to feel confident that their interest is really being placed first. Since it’s impossible for a fee-only advisor to be paid by sales commissions, the client can be more certain that the fiduciary standard will be followed.
3. Easier to know how much you’re paying
Whether by design or not, it can be hard to know how much a commission-compensated salesperson is being paid. It’s usually expressed as a percentage of the amount of a sale, varying from product to product. Unfortunately, we believe most clients don’t bother doing the math to convert their hidden cost into dollars and don’t know how much their advisor is getting paid when they sell a financial product.
The fee-only client can know much more easily how much the advisor is being paid. Typically, they see statements showing the management fee coming out of their investment accounts. In other cases, they see invoices with specific dollar amounts and pay by check or credit card. This makes it much easier for the client to know how much their advisor is being paid.
4. More holistic planning
Financial planning pioneer Bert Whitehead has pointed out that sales specialists tend to see their product as the solution to a variety of problems for which they’re really not suited. As the saying goes, “When the only tool in your toolbox is a hammer, everything starts to look like a nail.”
We believe you cannot invest your way out of having an inadequate estate plan or compensate for missed tax savings by buying an insurance policy. A comprehensive financial plan requires expertise in diverse subjects: tax planning, cash flow, sustainability of spending, estate planning, insurance, investing, charitable planning, and more. If a salesperson is compensated only when they earn a commission on an investment or insurance policy, they’re less likely to give adequate attention to other crucial aspects of their client’s well-being.
The fee-only model can compensate the advisor for their guidance on the entirety of the financial planning process, more closely aligning the advisor’s activities with the client’s financial best interest.
Increasingly, consumers are asking for unbiased, commission-free advice. The fee-only model is clearly the way of the future. A noted observer of the profession remarked that the trend from commissions to fees is clear, “in the same way that water running downhill can foretell where it will accumulate and pool.”1
We’re sure there are improvements still to be made on the various fee-only models in current practice. If you want to learn more about the different types of fee-only compensation models, see our page on what to look for in a financial advisor. We’re confident that, given the alternatives, our commitment to a fee-only practice is an essential part of aligning our clients’ interests with ours and delivering the highest-value financial planning possible.
Have questions about working with a fee-only financial planner? Give us a call.
1. Ken Robinson, JD, CFP® and Jacob Kuebler, CFP®, EA, (2016): The Financial Planners’ Retainer: A Reflection of Real Value, p. 8, citing journalist Bob Veres.
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