One of the questions we receive frequently here at AgingOptions, in our seminars or on the radio, involves choosing a financial adviser. We’re often asked something like this: “One financial planner is asking me to pay a fee, while another is compensated based on commissions. Which one is better?”
This recent article from the website Investopedia does a good job, we think, of clearing up the confusion – and these days there is plenty of confusion, created in part by pending changes to the financial planning world caused by something referred to as the Fiduciary Rule. This is a new set of rules from the U.S. Department of Labor that will take effect between April 2017 and January 2018, rules that change the relationship between financial advisors and their clients. From now on, once the rules take effect, a financial adviser has to put the interests of his or her client first, and openly disclose any potential conflict of interest, including commissions they earn from selling you a financial product they’re recommending.
Partly as a result of the new Fiduciary Rule, the brokerage community has come up with the label “fee-based” to describe their agents who are still allowed to earn commissions. So what’s the difference between “fee-based” and “fee-only” advisers, and which is best for you? As the Investopedia article puts it, if you’re confused about the difference between fee-only and fee-based financial planning, you’re not alone. But the article’s author, financial planner Brad Sherman, says, “Understanding the difference between fee-only and fee-based is important and could be the key to your long-term planning success.”
Let’s start with financial planners who are described as “fee-only.” These investment advisors are legally registered and have a fiduciary responsibility to you to create a plan in your best interest. And here’s the critical point, says Brad Sherman: “Fee-only advisors cannot accept any compensation as a result of product sales. In other words, they can’t make a commission from specific investments they recommend you purchase. They are paid directly by you—and only by you.” This payment can be based on an hourly fee, some form of monthly retainer, or a percentage of your assets that they manage – a figure each of you has agreed to. This is an important distinction, says Sherman, because “Fee-only advisors have fewer conflicts of interest. They are more focused on your needs than on selling you specific investments, since their compensation is not determined by sales volume or choice.” When you receive advice from a fee-only advisor, that advice is “completely free of attachment to financial products. The role of fee-only advisors is to only provide you advice that fits your current financial situation and your goals,” not products and services that may not the best choices for you.
By contrast, financial planners who are “fee-based” are not paid the same way, even though the terms sound similar. Sherman states that the financial services companies created the term “fee-based” almost as a marketing hook. “Because the terms sound so similar, it’s easy to think they are the same,” says Sherman, “but there is a major difference between fee-based planning and fee-only planning.” If you’re not careful, that difference can cost you money!
Sherman writing in Investopedia explains that fee-based planners earn a set percentage of your assets that they manage, instead of a retainer or a flat hourly fee. But on top of that, “fee-based advisors can also accept commissions from the financial products, annuities and insurance products they sell you. Each time you purchase one of those products, their earnings increase.” This, says Brad Sherman, leads to a fundamental conflict of interest. How can a financial advisor who wants to earn as much as possible ever be 100 percent objective in the recommendations he or she makes? Odds are they will always lean toward the investment choices that put a higher commission in their pocket. It’s just human nature.
So according to Investopedia, what’s the best answer to picking a financial planner? Sherman strongly suggests that you first find out how any financial planner you’re considering will be compensated before you hire them to manage your funds. A responsible planner should be willing to disclose his or her fees in writing and tell you whether or not they accept commissions. Sherman’s advice: Choose a fee-only planner. “By choosing an advisor who provides fee-only services, you stand a greater chance of avoiding any conflicts of interest,” he writes, because these professionals “have a legal, fiduciary obligation to work for you, and you only” – not for a company that pays their commissions.
Financial planning is one of the keys to an effective retirement plan – but it definitely isn’t the only key. Too many retirees think they’ve planned adequately for retirement simply because they have a financial plan in place, only to find out the hard way that their “retirement boat” has several holes in it. What about your legal protection – have you made sure you’re fully prepared? Have you considered what housing options might be best for you, especially as you age and your health changes? Is your family fully aware and supportive of your retirement plans and desires? And have you considered the important medical insurance choices you need to make? Here at AgingOptions, we work with our clients to blend all these elements together into a comprehensive retirement blueprint called a LifePlan. With a LifePlan in place, you’re assured of entering retirement years with confidence and security.
We invite you to explore the LifePlanning concept by spending a few hours with us at a free LifePlanning Seminar. Click here to find out the dates, times and locations of upcoming seminars – then once you’ve made your selection you can register online or contact us for assistance during the week. Why wait any longer? Take this important next step and join us for a LifePlanning Seminar soon – you’ll be very glad you did!
(originally reported at www.investopedia.com)