The continued uncertainty across the nation is forcing families to rethink their financial planning and retirement investment goals. According to a research survey by Employee Benefit Research Institute, only six in every 10 employees save for retirement. Additionally, a Gallop poll found that only 30% of US households have a long-term financial plan in place.
How Do Financial Advisors Receive Compensation?
As financial pressure continues to pile on overstretched family budgets, more Americans are open to seeking help from financial advisors to plan for their future. A common dilemma for most clients is picking out the proper payment structure. A fee based and fee only financial advisor sounds like the same thing, right? Well, not exactly.
How you pay your retirement planner for their services may dictate their ability to provide objective advice for your future. Currently, there are primary models through which a financial planner or advisor can receive compensation.
· Commission-based: Commissioned financial advisors receive a percentage compensation for the financial product that they offer to clients. The advice is typically tied to the investment product and may not be in your best interest.
· Fee-only financial advisor: A fee only financial consultant only receives compensation from the client. They do not accept any commissions, undisclosed fees, or payments from third part agreements.
· Fee-Based: Fee based consultants use a combination of both worlds, a partial payment by the client, and may also receive compensation for selling investment products.
Why You Should Prefer a Fee Only Financial Advisor
Fee only financial consultants only received compensation from the fees charged to clients. It may be through a percentage of assets invested, a flat fee, a retainer, or an hourly rate. The fee based consultant receiving compensation from the providers of the investment products they suggest may create a conflict of interest.
Naturally, the fee based retirement advisors will be inclined to recommend products that maximize their compensation, even when it is not in your best interest or position. You can lessen the conflict of interest by working with a fee only financial advisor.
Additionally, you may need to factor in fiduciary responsibility. With the client as the only source of compensation through fees charged, a fee only financial advisor can provide more comprehensive advice without any bias towards certain products. You can rest assured that all your interests are covered and protected. How do fee only financial planners charge clients?
The hourly-fee model applies where the financial advisors charge on the “time” spent managing your assets and providing advice for future planning. The compensation plan is more common in engagements with a limited scope and size.
2. Assets Under Management
Most financial advisors managing investments often prefer this model. The fee is assessed as a percentage of the total assets managed on your behalf. You can find customized plans, including fee “breakpoints” that lower your percentage as the investment balance grows.
3. Flat Fee
A flat-fee model uses a pre-determined amount that the clients pay before receiving the service requested. The service charge may vary depending on the financial plan or complexity of the project.
You can determine where a financial advisor’s allegiance lies by identifying the source of their compensation. If you need a fee only financial advisor in Chicago, schedule a meeting with a professional at The Tranel Financial Group.