You may have never heard of fee-only financial services before. Or maybe you’ve heard from friends and family that they don’t pay their financial advisors. The truth is that there is more than one way for financial professionals to use when servicing their clients. While some financial advisors work with their clients on a commission basis (where the advisor receives commission on the growth of the client’s portfolio), others follow the fee-only method.
Martin Scott, Founder of Lasting Wealth Principles, is a fee-only practitioner who believes this method is the most beneficial arrangement for clients because the services that are offered are more transparent, objective, and help to advance the Financial Planning profession.
In this article written by Martin himself, he discusses the benefits of fee-only financial services versus commission based financial services.
Fee-Only Financial Services
written by: Martin Scott
The purpose of this post is not to start a debate on what model is "right or wrong," but to share why I think fee-only, financial planning services provide the highest level of clarity and fairness to my clients.
When a client decides to hire a fee-only financial planner, then there are several payment options, which include flat-fee, retainer, hourly rate, and percentage of investment assets being managed. Regardless of the option chosen, a fee-only financial planner does not receive any form of compensation from anyone other than the client (i.e., does not receive commissions from any third party). By the client knowing that he or she is the only person paying the fee-only planner, it provides a level of clarity. The client can be confident that they are working with a financial planner and not a financial product salesperson.
There is no such thing as a business model that has no conflicts of interests, but the fee-only structure has fewer of them compared to other models. Fee-only financial planners do not sell financial products to clients for commission meaning clients' fees are not tied to the sale of a product. Since a fee-only planner has no incentive to sell any specific financial product, clients are more likely to receive more objective financial advice and recommendations. Take the following example.
George and Jane recently hired Mike who is a fee-only financial planner. They will pay Mike a flat quarterly fee for financial advice and recommendations across their entire financial plan. George and Jane got married a few years ago and just had their first child. During their life insurance planning meeting, Mike recommended that George and Jane each purchase $1 million of term life insurance, which would help support their child in the event of one (or both) of them dying prematurely. Since Mike is getting paid for his advice to them and has no financial incentive to sell them life insurance (i.e., a financial product), they know that the recommendation is objective, and in their best interest. Even further, Mike helped George and Jane find the most optimal life insurance products that were best for their situation.
Advancing the financial planning profession
The history of the financial services industry has shown that it started with a focus on the sale of financial products. There has been much progress in this area as over the years, more and more financial professionals are focusing on providing advice to clients, but I think there is still a long way to go before financial planning is acknowledged as a "true profession" by the general public. With a focus on providing advice to clients instead of just selling financial products, fee-only financial planners are likely to be competent and focus on continually learning. As fee-only planners gain more knowledge, clients get more value, and ultimately, the general public will start viewing financial planning more as a profession.