Given the title, you might be wondering if this article is biased in favor of fee-only financial planners. Of course it is! We’re not pretending to be objective about it. So, pardon us as we jump in and revel in the business model that we chose 23 years ago!
Our starting premise is that you, the investor, are intelligent, inquisitive, and thorough in your search for investment advice. In this article, we’ll share what we like about being fee-only planners and what we think the advantages are for you. There are, of course, other business models besides the fee-only approach, and there are other great financial advisors out there as well. We encourage you, the investor, to find the approach that works best for you.
Here are a few thoughts to consider:
Fee-only financial planners are paid only by their clients. We’re going to say this same idea in several different ways, so that it becomes crystal clear. And some additional information can be helpful here as well. Some financial advisors receive a higher payout from selling, for example, Mutual Fund A as compared to selling Mutual Fund B. So, although that advisor may be ethically as pure as the driven snow, it doesn’t change the fact that there is an intrinsic financial motivation for that advisor to recommend a particular product over another, regardless of the clients’ circumstances. As fee-only financial planners, we are free from this particular bias. It doesn’t matter to us whether you choose Mutual Fund A or Mutual Fund B. We don’t receive a fee from any mutual fund company, any custodian, or anyone else for recommending a particular investment. We are paid only by our clients. Our goal is to find the products and services that best suit your situation, your risk tolerance, your goals. The fee-only approach helps us, as advisors, to align our interests with our clients. As an investor, you can ask a potential advisor, “What are all of the ways that you are paid, if I become a client of yours?” The answer to that question will help you to fully understand the financial relationship you are considering with an advisor. The advisor’s disclosure documents (e.g., ADV) should include this information as well, but they can be mind numbing to read.
We were recently speaking with a financial planner who started out in the business with a different model of compensation, one that was commission-driven. He loved the process of creating financial plans, and seeing how a more appropriate asset allocation could help a client move toward their financial goals. But when it came to implementing those plans, he found it much more difficult because his employer was encouraging him to sell proprietary products (with higher commissions for him and his employer) that didn’t fit the needs of his clients as well as other options. That misalignment of values and goals is hard ethically and emotionally on the advisor, and doesn’t serve the client. I’m excited to say that this advisor now works in a fee-only financial planning business, and is much happier. Without the push to sell proprietary products, he (like us, at PWJohnson) can focus solely on what is most important to his clients.
This is not to say that there are no conflicts of interest for us as fee-only financial planners. We are paid a percentage of assets under management. And so with that, there’s a financial motivation to grow — and hang onto — those assets. But if we attempt to grow those assets by taking on too much risk, we are shooting ourselves in the foot.
There’s also the question of service versus sales. We believe the fee-only compensation model encourages a high level of ongoing service, because we’re paid over time, and that encourages us to keep the eye on the ball (the ball being your interests). Commission-based planners often get paid up front, as soon as the sale is made, and may have little incentive to continue to provide a high level of engagement and service.
Then there’s the question of flexibility. Let’s say a planner sells a fund and earns an up-front commission, but the soon after, the fund is no longer appropriate due to a manager change or if the client needs liquidity. If the planner earned an up-front commission, it’s difficult to justify the lost commission, which is often 3% to 4% of the original investment. And a new investment might rack up another 3% to 4% in up-front costs. Fee-only planners face no such impediments to recommending changes. If it’s right, we do it. There’s no question of whether or not the change is being made in the client’s or our interest.
Finally, there’s the question of the legal standard of care. This is a little esoteric, but the impact is real: fee-only planners are legally held to be fiduciaries; that is, we must put our clients’ interests before our own interests. Believe it or not — and this is a screwy aspect of U.S. law — commission-based planners don’t have to put the clients’ interests first. To be sure, they still must offer only what’s suitable for each client, but they are legally allowed to put their own interests first.
More and more planners are coming to the realization that knowledgeable investors prefer the fee-only business model, and as a result, our ranks are growing at a healthy rate. But not many can say they’ve been on the fee-only bandwagon for 23 years, as we have.
As a financial planning business, we know that our success depends on solid, long-term relationships in which our goal is to grow our clients’ assets consistent with the best interests of each particular client. Period. And, we wouldn’t have half as much fun if we weren’t truly doing everything in our power to care for the people who depend on us.