A personal finance blog dedicated discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance.


Friday, October 15, 2004

What is "Fee-Only" Financial Planning?

According to the National Association of Personal Financial Advisors (NAPFA) website, a fee-only planner is " who, in all circumstances, is compensated solely by the client, with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product."

Basically, the fee-only compensation structure allows for the consumer and the advisor to be on the same team. The advisor gets paid for their knowledge and time and for telling the consumer what is best for them. Fees can either be paid on an hourly or project basis, or the advisor can charge a management fee based on the assets that the advisor manages for the client.

Why is this important for consumers? The main concern with commission-based advisors is that the client may only be offered products or solutions that compensate the broker the best. I've known mutual fund companies to offer trips to those brokers who sell the most of their mutual funds. One can only imagine how many clients were sold mutual funds simply because the broker was trying to win a trip.

This does not mean that ALL commission-based advisors are bad. But, consumers need to be aware of the pitfalls of dealing with this type of advisor. Before a consumer signs anything, they should find out how much the product is going to cost them and how the broker is compensated.

So, does working with a fee-only planner guarantee success? Not necessarily. The compensation structure doesn't mean a thing if the advisor is incompetent. In a follow-up post, I'll give some pointers on what consumers should ask a prospective advisor.