What is Fee-Only Financial Planning?

fee-only financial planning

We’ve been talking a lot about the different types of financial planning there are lately, and it’s no secret that we hold a special place in our hearts for fee-only financial planning. But if you’re new to the world of financial planning and all that it entails, you’re probably wondering why.

The simple answer: fee-only financial planning = no third party compensation conflicts.

Fee-Only Financial Planning = No Third Party Compensation Conflicts

I’ll admit it, at first glance, fee-only financial planning seems like a raw deal for the consumer. I mean, why pay for something that you can get for free? Furthermore, why pay for something that you can get for free when the whole purpose of it is to grow your money?

Here’s why: because free financial advice isn’t really free.

When you go to commission-based financial advisor, they can sit with you and go over your financial picture, plot goals, strategize, and all that for no charge. But the minute products or services come into play, everything changes. That’s because they will naturally want to offer you products and services that offer them a commission. If that’s the only way they can make money for the exchange, what choice do they have?

If the case happens to be that those are the best products and services for you, then no harm, no foul. But how can you possibly know if you’re being given all of the appropriate options if you’re only presented with a select few?

With fee-only financial planning, your financial advisor can give you all of the appropriate options and then help you choose the best one for you. Why? Because they’re not getting commission. Since you’re paying them up front and they don’t earn commission, it’s in their best interest to show you what’s in your best interest. They need to help you succeed in your financial goals so you’ll want to continue working with them. 

When you pay up front, you know what you’re paying. You’re in total control of the situation. But if you go with a commission-based financial advisor, it’s much harder to understand how much you’ll pay – because what you’re paying for is marked-up services that may or may not be the best for you.

The Important Difference Between Fee-Based and Fee-Only Financial Planning

When you consider fee-only financial planning, remember that it’s not the same as fee-based financial planning (though they sound basically the same). Fee-only financial planning means that the financial advisor cannot get a commission from products or services they recommend. Compensation will always be in the form of a pre-disclosed fee.

Fee-based financial advisors, on the other hand, can receive commission from products and services they sell on top of the pre-disclosed fee they charge for their services. That means you’ll pay a fee and still potentially receive highly biased advice.

If you’re a financial advisor who wants to give advice that’s free of third party compensation conflicts or a consumer who wants to receive advice that’s free of third party compensation conflicts, go with fee-only financial planning, not fee-based financial planning.

You Get What You Pay For…

After years of offering “free” services, brokerages have done a great job of confusing consumers about what’s in their best interest. It’s not always easy to remember that the advice isn’t truly free, that it could be paid for in marked-up products and services. Therefore, the best thing to do is remember that, as consumers, we get what we pay for.

Free is rarely free.

Financial advice is a valuable thing. It’s valuable because it’s something all of us could benefit from, but few of us know how to do for ourselves. When something’s valuable, it should be paid for. But how you pay for it is where the question comes in.

Do you want to pay for it in the form of commissions to your advisor? In the form of potentially paying more for products and services so your advisor can get a commission? 

Or would you rather pay for it upfront for an amount you’ve already determined works for you and works for your budget? To ensure that the advice you’re being given is not influenced by third party compensation conflicts?

The choices is yours. Just remember, you always get what you pay for.

Image Credit: Visual Supply Co.

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