Fee-only financial planners are registered investment advisors who do not accept any compensation or commissions based on sales and must act in their clients’ best interests. If you thought all financial planners work this way, you’re mistaken. Some financial planners make money by selling you a certain type of product — even if it’s not the ideal one for your needs.
Before you get started on your path to financial independence, make sure you’re working with an ally who has your best interests in mind. Here’s everything you need to know about fee-only financial planners and how they’re different from other types of advisors.
- What Is a Fee-Only Financial Planner?
- What Fees Does a Fee-Only Financial Planner Charge?
- What Are the Benefits and Drawbacks of Using a Fee-Only Financial Planner?
- How To Find a Fee-Only Financial Planner
- Should I Use a Fee-Only Financial Advisor?
Fee-only financial planners are paid by their clients — not by a brokerage or financial product. They don’t make money on the side if they convince you to invest in a certain type of product that pays planners commissions. Because they’re not swayed by commissions or incentives, the advice they give you is typically focused on your best interests.
Besides fee-only financial planners, there are two other types:
- Commission-based financial planners
- Commission and fee planners
Here’s a closer look at the characteristics of a fee-only financial planner.
Understanding what the term “fiduciary” means will help you wrap your head around the whole concept. According to the Consumer Financial Protection Bureau, a fiduciary is “someone who manages money or property for someone else.” The key is this — your money should be managed for your benefit, not the financial planner’s.
Imagine you’re planning on retiring in five years, and you meet with an investment advisor. A fiduciary investment planner may suggest a safer, short-term investment, such as a certificate of deposit. The planner won’t earn a commission for suggesting a CD but recommends it as the safest option for your needs.
A non-fiduciary advisor, however, may push an index fund that tracks the stock market. It’s a riskier short-term investment because of the volatility of the market. It will also cost you more in fees and could yield the advisor a bonus for the referral.
So how do financial planners make money if they don’t earn a bonus or commission for recommending products? By charging you a fee for their time. When you pay an advisor, it improves your chances that the advice and guidance are in your best interests.
Fee-only financial planners must act in your best interests. To do so, they do not accept fees, kickbacks, commissions or any other rewards from companies and brokerages that may sway them. You can rest assured that the products a fee-only planner suggests are the ones the advisor believes are best for you.
Find Out: How Much Does a Financial Advisor Cost?
Now that you understand a bit more about the process, you may be wondering, “How much does a fee-only financial planner cost?” Cost depends on each financial planner’s fee structure. Here are examples of each type:
- Hourly fee: The average cost is $150 to $300 per hour, according to Thumbtack.
- Flat rate: A Kitces Research survey of financial advisors found that a standalone comprehensive financial plan costs, on average, $2,400.
- Percentage of your assets under management: The fee commonly charged is 1%.
- Retainer: You’ll pay a lump sum upfront for services rendered, which may vary.
If the idea of paying someone thousands of dollars to help you set up an independent financial plan sounds a bit steep, consider why it may be worth the investment:
- Fewer conflicts of interest: Fee-only financial planners are not employed by a brokerage or tied to a financial product. They work independently to provide you with financial advice that’s best suited for your goals and needs.
- Fiduciary duty: The plan they create and the decisions they make on your behalf are in your best interests and not swayed by a third party willing to pay them a commission or kickback.
- More investment options: An independent financial planner isn’t limited to products that pay referral fees and can take advantage of a wide range of investment options.
- Payment choices: You’ll have a few options on how you’d like to pay for services: a flat charge, an hourly fee or a percentage of your assets managed by the planner.
Although a fee-only financial planner seems ideal, there are occasions when you may want to avoid one:
- You like a certain brokerage’s products: You’re comfortable with a particular brokerage’s investment options, and you don’t mind that your advisor earns a commission on them.
- You’re not a novice investor: If you’re knowledgeable enough about investing to determine if a non-fiduciary advisor’s recommendations are right for you, it may be a good fit.
- You’re interested in saving money: If you’d like to avoid paying the potentially higher fees a fee-only financial planner charges, working with the advisors employed by a particular financial institution or brokerage could save you money.
Finding a fee-only financial planner takes a little legwork. They work independently; therefore, you can’t walk into your local bank or brokerage to meet with one. Financial planners who work at a brokerage or bank are likely non-fiduciary and employed to sell the financial institution’s investment products.
There are a few ways to find a fee-only financial planner:
- Use a directory, such as the Paladin Registry, to find a qualified and vetted fee-only advisor.
- Garrett Planning Network offers a nationwide network of fee-only planners for smaller or hourly projects.
- The National Association of Personal Financial Advisors is an organization of fee-only financial planners. NAPFA members pass more rigorous standards than credentialed certified financial planners.
You can also ask friends or family to recommend a fee-only financial planner.
Here’s More: How To Find the Best Financial Advisor for You
According to the National Association of Personal Financial Advisors, the fee-only method is the most upfront and fair compensation structure. If you want the peace of mind of knowing that the plan developed for your financial future was designed in your best interests, a fee-only financial advisor is likely the best option.
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