What is Fee-Only Financial Planning?
Financial advisors can get paid in various ways. In any financial advice relationship, it is important that you to know how you are paying the advisor and how much. That might seem like common sense, but you would be surprised how many have no idea. Some even mistakenly think they are getting advice for free!
There are 3 general ways advisors can get compensated:
Commission only
Fee-only
Fee and Commission (Usually called “fee-based”)
We at Teacher Wealth have chosen to be a fee-only firm because we think it minimizes the conflicts of interest when making recommendations and it also incentivizes providing good ongoing service to the client. But let’s be very clear. No matter what model is used, it is impossible to get rid of all conflicts of interest when it comes to financial advice. Incentives matter and do influence behavior.
Our intention is to be fair to all types of these models as we explain them, but just know, we might be a bit biased as we think about these pay structures.
Commission Only
These advisers get paid any time they sell a product. It could be an investment product (like a mutual fund) or an insurance product (like life insurance or annuities). The company that offers the product pays the salesperson.
Examples of common commissions you may see:
Life insurance - the commission is often 50%-100% of the first year’s premium. Additionally it can average 2%-5% of premiums in subsequent years.
Long-term care insurance - the commission is often 30%-70% of the first year’s premium and can average 4%-6% in years afterward.
Disability insurance - 30%-50% of first year’s premium.
Annuities - a range of 1%-10% depending on the type of annuity. Usually the more complex the annuity, the higher the commission.
Mutual funds - sales loads often average 3%-6% of the amount invested.
Some argue that commissions influence the advice given in negative ways. For example, the potential of a whole life insurance product being sold instead of term life insurance when it’s not appropriate because the insurance salesperson gets a much higher commission for the sale of the whole life product compared to term.
We don’t get paid this way but these advisers are important. People need insurance. We work with many good commission advisers all the time as we help our clients get the important products they need.
Fee-only
With fee-only advice, advisors are only paid by the fees they directly charge their clients. No third party is paying the advisor. So many argue it is cleaner.
Advisors are different in the specific fee they charge. Here are some possible fee arrangements:
Assets under management (AUM) - Advisors are paid based on a percentage of the total assets that the advisor manages for their clients. This usually ranges 0.8% - 1.5% per year. Sometimes this fee will include financial planning as well; sometimes not.
Project-based - A fee is charged for a specifically defined project. This is usually a one-time engagement. Often this is a comprehensive financial plan or work to advise on a specific part of a person’s finances (like college planning or Social Security decisions).
Retainer or Subscription - An ongoing fee (often monthly) allowing you access to the advisor. Advice is probably more comprehensive in nature. This can be all over the place depending on what services are offered but a common range would be $4,000 to $10,000 per year (or $350 to $850 per month).
Hourly - Clients pay based on the time that an advisor is working either meeting with a client or analyzing and preparing in the planning process. The longer the time needed, the higher the total fee. Hourly rates often range from $200-$400 per hour.
Other - There are a few other fee structures out there like basing the fee on complexity of the planning a family needs or a percentage of net worth.
All of these different fees have their pros and cons. Trust me when I say that there are debates (often heated) within the fee-only advisor community about which type of fee serve clients best.
From my perspective, there is no perfect fee structure and what is best for one client might not be ideal for another.
One advantage of hiring a fee-only professional is that they are almost certainly a fiduciary advisor when they are giving you advice. Meaning they are obligated to put their clients’ interests ahead of their own. (You might be asking yourself, “Shouldn’t all advisors be held to the fiduciary standard?” Well, I don’t make the rules, but understand your pain.)
Fee and Commission
These advisors are able to charge either fees or commissions. It depends on how the company is organized, but often they charge a fee on any investment management or financial planning they do, but are still able to sell investment or insurance products for a commission.
Some of their clients are paying fees while others are paying commissions. Some clients are paying both.
Whether these advisors are under the fiduciary standard can depend on how they are working with you or what services they are providing. To make sure you understand, it is best just to ask them if they are fiduciaries and when they stop being one.
Other Considerations
It is important to understand that no matter how you are being charged you may or may not be getting financial planning. And the advice they are giving may or may not be comprehensive to your entire finances. Both of which we at Teacher Wealth feel is very crucial to getting sound advice.
Also, the fees (and commissions) discussed above is what goes to the advisor. There are also other fees that you are likely paying. These can include:
Administrative fees
Annual investment operating expenses
Trading fees
Management fees
And more
Not sure about other types of advisors, but a fee-only advisor will be able to (and should!) show you all of the types of fees that you are paying and specifically how much they will cost you. Unfortunately, fees have often been glossed over in the financial industry causing ignorance and confusion.
Advisors are valuable and should be paid for their advice. But you should know exactly how and what you are paying.
