What Is A Fee-Only Financial Planner? Fee-Only vs. Fee-Based Financial Advice
In the financial services industry, thousands of financial advisors cater to clients’ diverse needs. But while advisor designations and specialty areas vary, so do how they are compensated. You may have heard the terms fee-only, fee-based, and commission-based advisors without knowing how they are different.
In this article, I’ll explain what it means for a financial planner to be considered fee-only, and I’ll let you know how fee-only planners differ from their fee-based and commission-based counterparts.
What Is a Fee-Only Financial Planner?
A fee-only financial planner is a professional who provides financial advice and services to their clients, and their compensation structure is based solely on fees paid by their clients. Most fee-only financial advisors charge a flat fee, hourly rate, or a percentage of assets under management (AUM).
Fee-only financial planners can assist with various financial goals, such as purchasing a home, investing for retirement, and setting aside funds for your children’s education. They consider your current debt, household income, and timeline when crafting a plan tailored to your needs.
Services Provided by Fee-Only Financial Planners
Here’s an overview of the services provided by fee-only financial planners:
Financial Planning Advice: Fee-only financial planners are equipped to provide personalized advice to help you meet your financial goals. They consider your current financial situation, future needs, and risk tolerance to create a tailored plan with recommendations that suit your lifestyle and objectives.
Retirement Planning: Retirement planning is a primary component of financial planning. Fee-only financial planners can help you figure out the amount of money you’ll need to save, optimize your investments, and maximize government benefits to secure your financial well-being during retirement.
Tax Planning: An experienced fee-only financial planner will also be proficient in tax planning. They will help you understand and minimize the tax implications of your investment decisions, income, and other financial activities, ensuring you comply with Canadian tax laws while taking advantage of available credits and deductions.
Investment Management: Effective investment management is crucial to building and preserving wealth. While not all fee-only financial advisors sell investment products, they can recommend suitable investment strategies and products based on your financial goals, risk tolerance, and time horizon. And since they don’t receive commissions from selling financial products, they are not incentivized to recommend investments that aren’t in your best interests.
Cost of a Fee-Only Financial Planner
The costs of fee-only financial advice will vary depending on factors such as advisor experience and the services provided. For comprehensive financial planning, the total cost might range from a few hundred to several thousand dollars, depending on the complexity of your financial situation.
When it comes to the percentage of assets, the average rate in Canada is around 1% of total assets being managed. For example, if your financial planner manages $1 million in assets, you’d pay about $10,000 or 1.00% in annual fees. Of course, fees may shift upwards or downwards depending on the size of your portfolio.
Some fee-only financial planners may charge a flat fee for specific services, such as creating a retirement plan or a budgeting strategy. Flat fees give you a clear understanding of the cost upfront and provide more predictable expenses.
Fee-Only vs. Fee-Based Advisors
People often confuse fee-only financial planners with fee-based planners, but there’s a difference. Fee-only advisors are compensated solely through fees paid by their clients for their services. These fees could be a flat fee, an hourly rate, or a percentage of assets under management (typically around 1% of assets).
This means that their interests are more aligned with yours, as they do not receive any commissions from selling financial products or executing transactions. As a result, they are less likely to have conflicts of interest when providing advice.
On the other hand, fee-based financial planners also earn a portion of their income from commissions on the sale of financial products and services. This may create potential conflicts of interest because the advisor could be incentivized to recommend certain financial products that may not be in your best interest.
However, many fee-based advisors are committed to acting in your best interests and providing unbiased advice, despite the potential for conflicts. When choosing between fee-only and fee-based advisors, it’s important to consider the following factors:
- Cost: Fee-only advisors may be more expensive upfront, but their fees could be more cost-effective in the long run as they do not rely on commissions. Fee-based advisors charge lower initial fees, but their ongoing costs include commissions for various financial products, which could add up over time.
- Transparency: You pay a fee-only advisor directly, ensuring transparency and a clear understanding of the costs involved. Fee-based advisors’ compensation structures can sometimes be more complex due to a mix of fees and commissions, which may be less transparent.
- Service: Both fee-only and fee-based financial planners can offer high-quality, comprehensive financial planning services. Make sure to evaluate the advisor’s expertise, reputation, and the services they provide before making a decision.
Fee-Only vs. Commission-Based Advisors
As mentioned, fee-only advisors’ compensation is solely composed of fees paid by you, the client. In contrast, commission-based advisors make money by selling investment products such as stocks, mutual funds, and life annuities and conducting transactions with your money.
These advisors receive commissions on the products they sell, which could create a conflict of interest. They might promote specific products or make investment recommendations based on the commission they receive rather than what is best for you and your financial goals.
As you can see, there are distinct differences between fee-only and commission-based advisors. When choosing a financial advisor, consider the pros and cons of each type and decide which one aligns better with your financial goals and needs.
Remember, a fee-only advisor might be a better fit if you value unbiased, client-focused advice, while a commission-based advisor may be more suitable if you’re looking for someone who specializes in certain investment products.
Tax Deductibility of Financial Advisor Fees
While you should always consult a professional advisor or accountant for tax advice, I will provide some general information on this topic.
In Canada, some types of financial advisor fees can be tax deductible. Typically, fees for managing your investments and providing investment advice are deductible. This can include fees paid to a fee-only financial advisor directly managing your investments. It is important to note that these deductions usually only apply to non-registered accounts, like a taxable investment account. Tax-advantaged accounts, such as TFSAs and RRSPs, generally do not permit the deduction of financial advisor fees.
Remember that you’ll need to provide sufficient documentation to support your claim, such as receipts or invoices from your financial advisor.
Final Thoughts On No-Fee Financial Planners
Financial planners provide a valuable service, but not every Canadian needs to spend money on a financial advisor. For example, the advice may not be worth the cost if you have a small portfolio. And with so many DIY investing options available today, it’s never been easier or cheaper to manage your own portfolio.
But for those who can benefit from professional financial advice, I recommend finding an experienced fee-only financial advisor who will put your best interests first.
Is a fee-only financial advisor better?
There are definite advantages to dealing with a fee-only financial planner. If you prioritize fee transparency and wish to avoid potential conflicts of interest with your financial planner, then a fee-only advisor is probably the better option. That’s not to say that fee-based and commission-based advisors don’t offer sound financial advice. Still, their compensation model is more complex, and the potential for a conflict of interest is more significant than with a fee-only planner.
Are there differences between fee-only planners in Canada and other countries?
While the basic premise of fee-only planners remains consistent across borders, specific regulations and industry standards may vary by country. In Canada, financial planners may hold various specialized designations, such as Certified Financial Planner (CFP) or Chartered Investment Manager (CIM). Meanwhile, the United States has its own set of designations and regulations. It’s crucial for you to ensure your financial advisor complies with the rules and standards of your home country.
What are the disadvantages of hiring a financial advisor?
There are some potential downsides of paying for financial advice, regardless of how your advisor is compensated. Advisor fees are a concern, as they range from 1.0% to 2.5% of the account value per year. Advisor fees can eat into your overall returns, so you need to make sure you’re getting value for your money.