Table of Contents:
Chapter 1: Fee-Only Comprehensive Financial Planning
Chapter 2: What is a Fee-Only Retirement Planner?
Chapter 3: What is a Fee-Only Wealth Management Firm?
Chapter 4: Why the Fiduciary Rule Matters
Chapter 5: An Overview
Fee-Only Comprehensive Financial Planning
What is fee-only comprehensive financial planning? Let’s break down both parts of the word.
Comprehensive financial planning by itself is a thorough, overall plan that takes into consideration the many factors in your life that affect your financial future. This plan becomes the roadmap to achieving your goals.
Just like with any good road trip, to establish a sound financial plan, a financial advisor assesses what drives someone and, we believe, should ask a lot of questions.
- Are you planning for an early retirement or a career change to follow a passion?
- How do you hope to spend your retirement?
- What would you like done with your assets after you’re gone?
- What are your concerns, goals and dreams for the future?
- Do you foresee any large upcoming purchases, such as children’s education or a move?
By creating a tailored, comprehensive financial plan, you develop a solid foundation on which you can build and maintain your financial security. Once your financial plan is crafted, a financial advisor should then work with you to implement your action items.
Then, there’s the fee-only aspect to financial planning.
Wall Street is well-known for hidden compensation and conflicts of interest. What fee-only means is an advisor’s compensation comes only from his or her clients. A fee-only financial advisor does not earn any commissions or referral fees on the investments and recommendations he or she makes to you.
How does this benefit you? It means your advisor provides non-biased financial advice that’s in your best interest. A fee-only relationship eliminates even the perception of a conflict of interest that might exist.
What is a Fee-Only Retirement Planner?
A fee-only retirement planner can only receive money from clients directly when recommending products, plans or investment opportunities. There are no hidden costs in the financial plan, and there are no incentives or commissions for any recommendations made.
This fee arrangement is different from how other financial professionals are compensated. For example, insurance agents receive commissions from selling insurance products, while some investment managers may receive kickbacks for recommending certain investment products.
The goal of a fee-only retirement planner is to remove any outside incentives from the retirement planning process. Even well-intentioned professionals not working on a fee-only basis will be aware of the possibility of recommending alternative and potentially inferior products or investment strategies to increase their own earnings.
Fee-only retirement planners typically charge fees based on a percentage of Assets Under Management with the firm (as long as the firm does not receive any benefit from recommending certain investment strategies or investment products). They can also charge retainer fees, which are flat, predetermined costs for a client to use their services. Retainer fees are often determined based on the amount of effort involved to provide the necessary services based on each client’s individual need.
What is a Fee-Only Wealth Management Firm?
At Financial Freedom, we value our clients’ success, so we chose to structure our company as a fee-only wealth management firm. What this means for our clients is:
- We do not accept any commissions or compensation from third parties for any of the services we provide; not just for our financial planning and/or retirement planning services.
- We will always provide independent and objective recommendations.
- We are your strongest financial advocates. Our retainer agreements are developed after getting to know a client’s wealth management objectives and the scope of our work together. As a fee-only firm, an investor can rest assured that their financial team has their best interests in mind.
Why the Fiduciary Rule Matters
A fiduciary responsibility is the highest level of legal duty one party can owe to another, and it is the level of care that Registered Investment Advisors (RIAs) and fee-only financial planners provide. With fiduciary responsibility, the advisor is required to put clients’ needs above his or her own opportunities to profit. While fee-only eliminates the possibility of a conflict of interest, a fiduciary duty takes the commitment to another level, legally bounding an advisor to perform in their clients’ best interest.
For example, RIAs must make investment decisions that they believe will be most advantageous for their clients’ financial plans, even if the decision does not benefit the RIA in any way.
In contrast, investment professionals who hold themselves to the less rigorous “suitability” standard of care are only required to suggest an investment recommendation or strategy is “suitable” for the client. Because of this more lenient practice, brokers can profit more easily from a transaction, and they do not need to put their clients’ interests above their own.
The dictionary definition of a fiduciary is a person who can be trusted to work for the benefit of another. The first fiduciary relationship that often comes to mind is that of a lawyer whose clients trust him or her with legal matters. Lawyers must do everything in their power to work in their clients’ best interests. The rule is clear-cut: All lawyers have a fiduciary responsibility to their clients. For the sake of simplicity, lawyers cannot represent both the plaintiff and the defendant at the same case, for example.
Similarly, in financial planning, a fiduciary is an advisor whose clients trust him or her with financial matters. Fiduciary financial advisors must put their clients’ interests above their own. Unfortunately, the finance world’s definition of a fiduciary is not as straightforward as that in the legal realm. Although common sense should prevail in defining the responsibilities of financial advisors to their clients, not all advisors are required to adhere to the standards of a fiduciary.
Here’s an example:
Given the chance to pick one of two similar products, a non-fiduciary advisor isn’t necessarily going to pick the one that charges the lowest fee, but rather could choose the one that pays the highest commission. He or she simply has to abide by the suitability standard – as long as an investment recommendation is suitable for the client, he or she has done the job.
The problem with this business practice is that little fees add up. The difference between paying 0.75 percent and 0.25 percent, for example, on a particular investment may not seem like a big deal initially, but compound the difference over a number of years, and you can see the expense.
When you seek investment advice, think about the fiduciary rule. It is your future nest egg after all that is at stake.
All financial plans are different. But we believe that a comprehensive financial plan should address these 7 major aspects of a person’s financial life:
- Asset allocation, investment recommendations and portfolio management
- Retirement planning
- College funding for children or grandchildren
- Risk management and insurances
- Cash flow and taxes
- Estate planning
- Stock options, executive compensation, etc.
A true comprehensive financial plan should also be tailored to each individual client, focus on that client’s specific life goals and objectives and be updated on a regular basis.
Read our blog article: How to Manage Your Finances During COVID-19 Market Volatlity