Fee-Only financial advisor
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Fee-Only financial advisors, as defined by the review materials for the Certified Financial Planner (United Kingdom) exam, are compensated only by their clients and accept no commissions or compensation from other sources, such as insurance products or investments; rather, fee-only advisors charge only hourly or fixed fees (including retainers). Many confuse "fee-only" with "asset-based" advisors who charge a fee calculated as a percentage (e.g., 1%) of assets under management. The fee-only model of compensation reduces the potential for conflicts of interest between the advisor and the client in that the advisor is not beholden to insurance, investment, and other financial companies.
A true fee-only advisor may reduce conflicts such as:
- an incentive to take too much risk in a portfolio to generate additional gains that translate into "raises" for the asset based advisor
- an incentive to convert non-cash assets such as real estate and collectibles to cash and securities so that the advisor can generate a fee
- an incentive to minimize necessary trades because this may result in additional costs to the advisor if trading costs are included in the asset-based fee
Working on a fee-only basis allows the advisor to:
- Customize an investment portfolio that is designed to help the client realize short-term and long-term investment goals.
- Provide simplified performance reporting, making it easy for clients to monitor their accounts.
- Support the client with ongoing professional advice, timely information about accounts and updates on the world’s financial markets.
- Manage a client's portfolio and make investment changes--without commissions--as your objectives or the economic climate changes.
On the downside, it is worth noting that:
- Operating on a fee-paying basis may make the advice too expensive to obtain for the broader market otherwise catered for by commission-based advisers. If a client must pay $1000 in fees to his adviser as a lump sum, this is much less manageable for all but the wealthy, than the more manageable option of paying through regular charging and commissions.
- While fee-based advisers may not demonstrate outright commission bias, they may still have personal 'favourites' amongst product providers and investment houses that lead to one provider being specifically favoured over another when advice is given.
The U.S. National Association of Personal Financial Advisors (or NAPFA) is an organization that was created in 1983 to aid the field of Fee-Only financial planning, but does allow members who charge a percentage of assets under management to use their "Fee-only" designation.
