If you have been looking for a financial planner, you may have noticed some advisors label themselves as “fee-only” and others choose “fee-based”.
You may be asking yourself, “does this distinction matter”? You might be surprised to learn that there is a material difference between these two minor changes in wording, and it directly affects how you compensate these financial planners. We will review some of these differences below.
Fee-Based Financial Planners
If you agree to work with a “fee-based” financial planner, you should first and foremost understand that he or she can receive commissions for products they recommend and use as part of executing your financial plan. Why is this important? The reason is your financial advisor may have a financial incentive to sell you certain investments, for example, because they offer a higher commission (or payment) to the advisor. To be clear, there are many fine commission-based products that may be suitable for your objectives, but they can also potentially create a conflict of interest for your financial planner.
It is always important when working with any financial planner to discuss how the advisor is paid. With fee-based advisors, you should question the commission structure on recommended products and ask how he or she analyzes all product options for clients so you can feel more confident that the advisor has your best interests in mind.
You can also search for the planner’s Form ADV filing, either at the U.S. Securities and Exchange Commission website or through the state regulator’s website, as this form will provide more details about the advisor’s compensation structure.
Also ask whether your fee-based financial planner is a “fiduciary”. Fiduciary duty legally requires the advisor to make choices in your best interest. To maintain their fiduciary duty, the fee-based planner must disclose to their clients any time they receive a commission to avoid any potential conflicts of interest and maintain fiduciary responsibility.
It is important to know that the incentive to recommend certain financial products over others is present in a fee-based structure. This is not the case with a fee-only financial planner.
Fee-Only Financial Planners
When you work with “fee-only” financial planners, you pay them a fee which is typically based on a percentage of your assets under management. With this compensation structure, a fee-only financial advisor’s incentives are properly aligned with yours — he or she will earn more money as your wealth increases. Importantly, there are no product commissions under a fee-only compensation structure, which greatly reduces the risk of potential conflicts of interest.
Which Type of Financial Planner Should I Choose?
There is no definitive right or wrong answer to this question. Commissions by themselves are not a bad compensation structure and there are many qualified fee-based financial planners that act as fiduciaries.
Just keep in mind that fee-based planners who are not fiduciaries may recommend commissionable products because they are “suitable” for you but may not necessarily be the best or most cost-effective option for you. A fee-only financial planner does not have these potential conflicts of interest because their compensation is not tied to the sale of commissioned products.
About: Modera is proudly a fee-only and independently owned financial planning firm that acts as a fiduciary for our clients. We have built our organization to put our clients’ interests first.
Call Modera and our Atlanta, GA financial planners to learn more and set up an initial meeting with their team.
Modera Wealth Management, LLC (“Modera”) is an SEC-registered investment advisor with places of business in Massachusetts, New Jersey, Pennsylvania, North Carolina, Georgia and Florida. Modera may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements. SEC registration does not imply any level of skill or training. For information pertaining to our registration status, fees and services, please contact us or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov) to obtain a copy of our disclosure statement set forth in Form ADV Part 2A. Please read the disclosure statement carefully before you invest or send money.
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