Fee Only FAQ

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What does “Fee-Only” mean?
Do “Fee Only” and “fee based” mean the same thing?
What other forms of compensation are there in the financial services marketplace?
Why should I prefer Fee-Only financial planning to the alternatives?
Has the Fee-Only compensation model always been around?
Tell me how all this relates to the notion of Fiduciary responsibility.
If you don’t sell any investment or insurance products, how will I implement your advice?
How will you provide me with ongoing support with my personal finances and investments?
Where Can I find out more about the benefits of using a fee-only financial adviser?

What does “Fee-Only” mean?
In the realm of financial planning, “fee-only” means that you hire a financial adviser and directly pay him or her a fee for services rendered. With respect to you the client, the fee-only financial adviser wears a single hat, that of trusted adviser.

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Does “Fee Only” and “fee based” mean the same thing?
Caveat Emptor! They truly don’t! Fee Only advisers receive compensation only directly from their clients to minimize conflicts of interest and Fee-Only advisers have a Fiduciary responsibility to their clients. “Fee based” advisers provide investment advice for a fee paid by the client but then will strongly desire to sell you investment and insurance products and will receive a commission and/or 12B-1 fees from the product providers for doing so . “Fee based” advisers may or may not assume a fiduciary responsibility for your financial well-being. Make sure you know which type of adviser you’re working with!

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What other forms of compensation are there in the financial services marketplace?
The primary alternatives to fee-only compensation are commission based compensation and 12b-1 fee compensation. These two models of compensation predominate at most major banks, financial advisories and brokerages such as Ameriprise Financial, SmithBarney, Merrill Lynch, etc. In both these models, you will be sold investment products for which you will pay some combination of upfront or back-end sales charges and ongoing fees. In both of these models the “adviser” is paid by the investment company that offers the products you buy. With respect to you the client, commissioned and 12b-1 fee advisers wear two hats, that of adviser and product salesperson.

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Why should I prefer Fee-Only financial planning to the alternatives?
There are several reasons why seeking the services of a fee-only financial planner may be better suited to your needs and interests:

  • There is an inherent conflict-of-interest in the commission and 12b-1 fee compensation models that is not present in the fee-only model. Specifically, in the commission and 12b-1 fee models the investment adviser stands to gain monetarily if you follow his or her investment advice. On the other hand, the fee-only model fosters objectivity on the part of the adviser because he or she will have no other reason to recommend an investment to you except a desire to counsel you wisely.
  • Commissioned and 12b-1 fee planners will only be willing to advise you regarding that subset of your assets you can invest in the products they sell. Typically, they will not be willing to advise you regarding assets that are locked into 401K’s, 403b’s, and other employer sponsored savings plans. This is key – only a fee-only adviser will help with diversification, asset allocation, tax optimization and rebalancing across your entire investment portfolio not just a subset.
  • Fee-Only planners stand ready to help you with a much broader spectrum of financial challenges than commissioned advisers because they don’t restrict their services to those revolving around the sale of investment products. For example, you wouldn’t call your commissioned adviser to get advice about a mortgage refinancing, a tax problem, and insurance needs analysis or an estate planning idea. A Fee-Only adviser can be your single source of advice for all your personal financial challenges.

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Has the Fee-Only compensation model always been around?
Yes, but until recently, relatively few financial planners implemented this model, and fewer still provided as-needed services. In the last 10 years or so the model has gained advocates, especially among industry observers and interested parties. For example, Jonathan Clements*, a regular personal finance columnist for the Wall Street Journal, recommends the fee-only model exclusively (as per past columns). So does the AARP* (as per its web site). As a result of this trend favoring objective advice, more planners are adopting the Fee-Only model and mantra. That being said, many of these planners cater to high net worth people using the “assets under management” strain of fee-only planning whereby they receive as their fee a percentage, say 1%, of the client’s managed assets. There are still relatively few financial planners offering hourly, as-needed, Fee-Only services to all. (*I am in no way affiliated with either Jonathan Clements or the AARP.)

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Tell me how all this relates to the notion of Fiduciary responsibility.
It is ideal to work with a financial adviser who is obligated to put your best interests above all else when advising you. This obligation is referred to in the financial services profession as the fiduciary standard. If the person you would like to work with is a Registered Investment Adviser then she or he is governed by the Investment Advisers Act of 1940 and has a fiduciary responsibility to you. When considering who to trust for financial guidance you should ask candidate advisors if they are a registered investment adviser. You will find that very few employees of the big name broker-dealers like Merrill Lynch, Edward Jones, Ameriprise Financial and the like are registered investment advisers. Any candidate adviser who is not so registered is not obligated to put your interests first when counseling you. Note that Apropos principal, Kay Conheady, is a Registered Investment Adviser.

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If you don’t sell any investment or insurance products, how will I implement your advice?
We will provide you with all the direction and support you need to implement our advice with respect to the specific no-load, low expense investment products we recommend to you (assuming your portfolio needs any changes at all). We provide the technical know-how and you provide the labor. Once clients see the process in action, they realize they needn’t have been concerned about either the difficulty or the amount of time that would be required. We believe this is the most cost effective way for people to invest. With respect to any insurance advice we provide, we will refer you to reputable insurance options that are specifically designed to keep the costs of coverage to a minimum.

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How will you provide me with ongoing support with my personal finances and investments?
Like our cars and our houses, our investment portfolios need periodic maintenance. They need to be rebalanced back to a target asset allocation, managed for tax issues, reconfigured to take advantage of advancements in and changes to investment products, strategically liquidated to provide income during retirement, and so on. As part of our deliverables for your initial engagement, we will provide you with guidance about when to come in for a check-up engagement. This guidance will be tailored to your unique circumstances. Plus, you can call us at any time if a new issue arises that your plan didn’t anticipate. This service model can save you money because you only pay for services rendered to you, as they are truly needed.

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Where Can I find out more about the benefits of using a fee-only financial adviser?
Visit the following web sites:
www.GarrettPlanningNetwork.com
www.napfa.org

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But…will I benefit from fee-only financial planning?