March 4, 2024

By Daniel Masuda Lehrman, CFP®, CSLP®

What is a fee-only financial planner?

A financial advisor or planner helps you make critical financial decisions that can have massive life implications.  Making the wrong decisions could lock up your money for years in terrible financial products, affect your ability to retire, provide for your loved ones, and leave a lasting legacy for your heirs.   So when working with an advisor,  it’s absolutely essential to make sure they are a fiduciary and understand how they’re paid.  

So, what is a fiduciary?

A fiduciary financial advisor is legally and ethically required to act in your best interest (before their own) and disclose any conflicts of interest.  

Most “advisors” (including those that call themselves financial consultants, financial professionals, etc), are NOT fiduciaries.  

Finding an advisor you trust and vibe with is important.  You may have an old ride-or-die friend from high school that works as a financial advisor.  Just because you’d trust them to watch your kids or keep your secrets does NOT mean they will act as a fiduciary when it comes to your money.  They might have the best intentions and genuinely believe what they’re doing is helping people.  Ask them if they are a fiduciary and how they are compensated.  Ignore this at your own peril!

Long story short, working with a fiduciary fee-only advisor can dramatically increase the odds of getting quality money advice from someone you can trust.

So, why is it important to understand how a financial advisor is compensated?

Some advisors, even those with a CFP designation, will call themselves fiduciaries, but only sometimes.  They can act as salespeople in some cases (not a fiduciary), and an advisor (fiduciary) in other cases.   It is crucial to understand how a financial advisor is compensated in order to ensure that you are receiving unbiased advice that is in your best interest.

Let’s compare 3 common compensation models:

Commission-based financial advisor

A commission-based advisor earns sales commissions on financial products they sell

There are rarely any initial fees or barriers to entry to speak to a commission-based advisor and they may even offer “free” financial advice.   But beware, an advisor who only earns sales commissions is not a fiduciary.   Commission-based advisors are held to a lower “suitability” standard rather than a "best-interest" standard.  To say they are biased or riddled with conflicts of interests is an understatement.  

I’m not trying to demonize commission-based advisors.  Many of them genuinely believe they’re helping their clients, but follow what their company coaches and incentivizes them to do.

Get a second opinion if what you’re being recommended is an annuity or whole life insurance policy, because these are the products that carry the highest commissions, making them incredibly lucrative to sell.  The core issue is a matter of incentives: If your advisor’s livelihood depends on selling a product, chances are they’ll go to great lengths to promote that product heavily.  

Fee-based financial advisor or financial planner

A fee-based financial advisor can earn both fees and commissions.

Notably, they can be a fiduciary sometimes and broker (not a fiduciary) at other times. It depends on the situation.  Fee-based and fee-only are not the same thing.  For example, a fee-based advisor can charge advisory fees in addition to earning commissions on selling you a life insurance policy, while a fee-only advisor is ONLY compensated by you, the client.  

Fee-only financial planner

A fee-only financial advisor is paid directly for the services they provide.

The idea is to simply charge for services offered (advice, planning, investment management) and quote a cost, rather than earning commissions on products sold.  It makes things more transparent and eliminates hidden sales incentives, ulterior motives, conflicts of interest to sell a certain product or company offering.  A fee-only advisor is a fiduciary at all times.  This model is similar to how attorneys bill for legal services.

Fee-only advisors might charge fees in a variety of ways:

  • Monthly, quarterly, or annual retainer fees
  • Assets under management fees (AUM)
  • Hourly fees
  • Project-based

‍Compared to the commission-based model, the fee-only model can be prohibitively expensive and often skewed towards higher-income or higher net-worth clients.  “Free advice” is rarely, if ever, offered apart from an initial consultation.  

The fee-only model eliminates many, but not all conflicts of interest.  For example, if a client is paying their advisor 1% to manage their account, what happens if that client asks about the advisability to liquidate that account to pay off their mortgage?  It’s the fiduciary duty of a fee-only advisor to disclose these types of conflicts of interest when they occur.

Working with a Fee-Only Financial Planner to create your financial plan

Different types of advisors, such as fee-only financial advisors or fee-based financial planners, may have varying fee structures that can impact the advice they provide. By working with a fee-only financial advisor, you can avoid potential conflicts of interest that may arise from advisors who charge fees based on the products they recommend, such as mutual funds, annuities, and life insurance.  Advisors who adhere to the fiduciary standard, such as those certified by the National Association of Personal Financial Advisors (NAPFA) or the CFP Board are required to act in your best interest when providing comprehensive financial planning services, including retirement planning and investment management.

By hiring a fee-only advisor who is also a Certified Financial Planner™, you can trust that they have the knowledge and expertise to help you achieve your financial goals.  Understanding financial advisor fees is essential to finding a financial advisor who aligns with your values and objectives, whether it be through fee-only and fee-based financial planning services. Ultimately, taking the time to research and find a financial advisor with a fee structure that suits your needs can provide peace of mind and confidence in your financial future.

A great place to look for a fee-only financial planner is the XY Planning Network search tool, which lists only fee-only financial planners who are also Certified Financial Planner (CFP®) professionals.  You can find many in your local area, though many can serve you remotely.  You can also try the  CFP® Board (which includes both commissioned and fee-only planners), the Fee-Only Network, and   Full disclosure, I’m listed on all three.  You can find my XY Planning Network profile here!  

Questions to ask your fee-only financial planner:

Interview 2-3 advisors:  Here’s a few essential questions you can ask to find out how they work and if they’re a good fit for you:

  • Are you, without situational exceptions, a fiduciary at all times with all your clients?  
  • How do you earn money?
  • Do you have a clean regulatory background?
  • What education, certifications, and experience do you have?
  • What kind of experience do you have with goals like mine?
  • How many clients are you currently working?
  • What is your typical client size?  
  • How often will we meet and how can I contact you?
  • What is your financial planning process?
  • What is your investment philosophy?

See an expanded list of questions to ask a financial advisor.

Ready to interview Masuda Lehrman Wealth?  Schedule a quick introductory call here, or learn more about how it works.  

About Daniel Masuda Lehrman

I am a Fee-Only Fiduciary and Founder of Masuda Lehrman Wealth LLC. Prior to starting my own firm, I was a Vice President Financial Consultant at Charles Schwab in their Downtown Honolulu office. I have worked in financial planning for 10 years at Vanguard, Fidelity, and Schwab. I'm a CERTIFIED FINANCIAL PLANNER™ professional (CFP®) and Certified Student Loan Professional with an Economics degree from the University of Michigan.

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