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The Important Differences: Fee-Only vs. Fee-Based Financial Planners

You have options when it comes to getting financial advice. Many people don't realize there are several types of personal financial advisors who, while on the surface may sound similar, are actually quite different in their approach.

Specifically, do you know what sets a fee-only, fiduciary investment advisor apart from a fee-based investment advisor? Before choosing a partner to help make major investment, saving, and retirement planning decisions for your future, make sure you understand the distinction.

Fee-only vs Fee-based Investment Advisors – Understanding the Difference

The most important difference between these two types of financial advisors is how they get paid.

Fee-only financial planners get paid by you, and only you. A fee-only investment advisor may charge a flat fee, an hourly rate, or a percentage of assets under management (typically 1% of the portfolio value per year) directly to the client. This type of personal financial advisor is also:

  • Legally prohibited from receiving other forms of compensation like commissions or payments from vendors of financial products.
  • A “fiduciary,” which means they are legally obligated to put the clients’ interests first. The two types of fiduciaries are registered investment advisors and certified financial planners.

By contrast, a fee-based financial planner receives payment from you (the client) but also via other potential sources, such as commissions from providers of financial products. When you work with a fee-based financial planner, you're at risk of buying products that benefit your advisor, not you. Here’s what you should know about fee-based financial planners:

  • Ask your potential advisor if they are a “broker,” “dealer,” or “registered representative” – if they answer yes to any of those, they are a salesperson who receives commissions
  • While a fee-only fiduciary advisor is legally obliged to put your interests first, fee-based investment advisors need only provide “suitable” options

Now that you understand these two types of financial advisors, let’s dispel some of the myths you may encounter when it comes to your financial planning.

Myth # 1 - You’ll Save Money with a Fee-Based Financial Advisor

If you think a fee-based financial advisor will save you money, think again. A commission-based model may sound less expensive at the outset, but is it worth the risk of them selling you a product with sub-par performance? Remember, commission-based advisors receive incentives for what they sell, regardless of whether it’s the best fit for your specific needs.

A fee-only fiduciary investment advisor will conduct a thorough analysis of every aspect of your financial life. By examining everything from cash flow and spending to budget and goals, they’ll come up with a plan to maximize returns and fit your lifestyle. Between higher returns, savings on hidden fees, and not wasting money on products that aren’t a good fit for you, a fee-only advisor will ultimately be the most cost-effective option.

Myth #2 - A Fee-Based Advisor Will Provide a Higher ROI

Another common misconception about investing is that fee-based (aka commission-based) advisors offer the highest ROI. Many people hear “commission-based” and think that an advisor earns commissions based on the growth of their clients’ accounts. But that is dead wrong. Fee-based advisors earn commissions based on which products they sell, regardless of the ROI provided to the customer. Think of it as a kickback for recommending a specific product or company.

Unfortunately, no one, not even a financial advisor, knows just how the market will perform. Therefore, your best bet is a diversified, long-term plan that focuses on your objectives, not media frenzy or product hype. Having an advisor by your side who has your best interests in mind is the clearest path to ROI.

Myth #3 - Retirement Planning is a One-and-Done Situation

It would be nice to have a set-it-and-forget-it wealth management plan. However, that’s not the reality of financial planning, nor is it in your best interests.

Financial planning should be a holistic and ongoing activity. As your goals and your life circumstances change over time, your financial advisor will help you adjust the plan. That way, you’ll have a long-term strategy that always works towards your stated goals.

When it comes to something as important as your financial future, there are many benefits to using a fee-only advisor. An investment advisor acting under fiduciary oath will help you:

  • Gain an understanding of your financial situation
  • Prioritize your financial goals
  • Preserve and enhance your wealth
  • Manage and minimize taxes
  • Create a sustainable, realistic and long-term plan for retirement
  • Save precious time by avoiding common pitfalls
  • Develop financial clarity and confidence

Contact us to find a fee-only financial planner who will set your retirement plan on the best path.

Denver Fiduciary Guide

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