What’s a Fee-Only Financial Planner? And Why You Need One
How is a fee-only financial planner different?
A fee-only planner is just like any other financial planner EXCEPT for a very important distinction:
Fee-only financial planners do NOT get paid commissions on the products they sell. They charge a FEE for their financial advice instead.
More importantly, fee-only planners do NOT get cash bonuses for selling inappropriate investments that will harm you. Fee-only planners do NOT get punished for failing to meet sales quotas. Fee-only planners do NOT rely on a commission-based compensation structure, which tempts normal stockbrokers to sell you bad investments.
The most dangerous investments, which have the highest potential for being unsuitable (like Non-Traded REITs, Variable Annuities, and other and difficult to understand and risky investments), pay some of the highest commissions in the industry to the stockbrokers who sell them.
Commission-based compensation structures create a strong temptation for stockbrokers to sell dangerous and harmful investments to naïve investors who could be hurt by them.
It takes clearheaded, strategic thinking to determine whether a particular investment is appropriate for a particular client. If a broker can make a $5,000 commission for selling a bad investment to a client, versus a $500 commission for selling a good investment, the broker will be tempted to give the bad recommendation. It’s as simple as that.
Unfortunately… Most stockbrokers on Wall Street dealing with middle-class Americans get paid this way.
The CIRC applauds honest stockbrokers for the work they do, and the CIRC wants to believe that the majority of commission-based brokers act in the best interest of their clients.
However, most commission-based brokers have intense pressure bearing down on them to meet sales quotas. And even though it is unlawful, some commission-based brokers are incentivized to push risky and inappropriate investments on unsuspecting investors.
In fact, commission based compensation structures have created a “twisted culture of fraud” inside the investment industry. This twisted culture has blurred the definition of what is ethical and many brokers on the “inside” find it perfectly acceptable to recommend dangerous investments to unsuspecting clients, just so they can make a buck. Considering that so many Americans depend on the expertise of stockbrokers to safeguard their hard-earned retirement savings – this reality is nothing short of horrific.
This is not to say that every financial advisor is disreputable. The CIRC wagers that most brokers are doing a good job of navigating the ethical challenges inherent in their position. However, the risk of falling into the hands of a dishonest stockbroker is ever present. Considering that one’s life savings and future are at stake, no amount of caution is too much when looking for a new advisor.
How to find an investment advisor you can trust
At the CIRC, we talk to a lot of people who are harmed by dishonest stockbrokers. Some of them have lost hundreds of thousands, and sometimes millions, of dollars. When such a victim asks the question, “How can I find a trustworthy stockbroker?” we explain the distinction between a fee-only advisor and a commission-based advisor.
Because the potential for fraud is dramatically reduced with a fee-only financial planner, the CIRC wholeheartedly supports and condones this often-unknown subsection of the financial advisory community.
A fee-only financial planner’s compensation doesn’t depend on how much money he gets for selling you certain investments. As a result, the advisor-client relationship with a fee-only planner is cleaner.
A fee-only planner doesn’t have to worry about his pocketbook when making investment recommendations. If you’ve hired him, he’s going to get paid whether he sells you something or not. In this sense, it will be easier for him to act in accordance with your best interests and needs.
Also, just like a commission-based investment advisor, a fee-only planner is bound by his fiduciary obligation to favor YOUR interests over his own. As a result, fee-only advisors have fewer inherent conflicts of interest, and they generally provide more comprehensive advice.
The National Association of Personal Financial Advisors (NAPFA) is a professional association of fee-only planners. The association offers a searchable index of its members located throughout the United States on its website, www.napfa.org.
Finally, t is important not to confuse a “fee-based” financial planner with a “fee-only” financial planner. A “fee-based” financial planner takes a fee AND a commission for selling investments. When seeking out a fee-only planner to help you safeguard your assets and plan for your future, make sure you know the difference.
Always ask your stockbroker for detailed information about how he is getting paid. This will help you evaluate how trustworthy his advice is.
Stand up for your rights!
If you or your loved one has been victimized by stock fraud or stockbroker negligence, try and get your money back!
Contact the CIRC and speak with a stock fraud expert now.