We get a lot of questions about the meaning of fee-only as a way of doing business. Over the past several years fee-only financial planning has been heralded as the perfect answer to the conflict of interest problem posed by other industry compensation models. So, what does fee-only mean? What makes it different?
At Bell Financial Planning Co., fee-only is at the core of our business philosophy. It defines everything about our responsibilities and our relationship with you. As fee-only financial planners, we are paid by the hour for comprehensive financial plans. For managing money, we are paid based on the total portfolio value that we manage for you. We never receive commissions from the investments we purchase for you. Regardless of the investments we make on your behalf, our compensation is fully disclosed and agreed upon up front by you. You know exactly how we get paid and exactly how much we get paid. This eliminates potential conflicts of interest and gives you the assurance that your finances, not ours, are the number one priority in every transaction.
In contrast to the fee-only model of doing business, most financial planners and advisors receive commissions from products they sell to you. For example, commissioned advisors often charge a front-end sales commission up to 8.5% of your investment when you purchase a mutual fund (see SEC explanation of mutual fund fees & commissions). If you were to invest $10,000 in a mutual fund with a common 5.75% upfront sales charge, $9,425 would actually be invested and $575 would be charged as a commission. We believe this method of doing business raises a potential conflict of interest between the planner's compensation and the investments recommended to you. Sometimes it is hard to know if your advisor is working in your best interest or in the interest of their commission.
Conflicts of interest of this type aren't limited simply to mutual funds. They can also be found in sales of insurance, annuities, mortgages and referrals made by financial advisors. As fee-only financial planners, we do not accept commissions or any other outside incentives and therefore do not incur this potential conflict of interest.
Does this mean that all commissioned-based financial advisors are bad? Of course not. They are not all bad, nor do they all work against the best interest of their clients. If your advisor is up front and honest about disclosing the amount and source of their compensation and you are made aware of the potential conflicts of interest, then you may have a perfectly forthright relationship with your planner.
Bell Financial Planning subscribes to the oath of the leading organization of fee-only financial planners: The National Association of Personal Financial Advisors (NAPFA).
The NAPFA Fiduciary Oath
The advisor shall exercise his/her best efforts to act in good faith and in the best interests of the client. The advisor shall provide written disclosure to the client prior to the engagement of the advisor, and thereafter throughout the term of the engagement, of any conflicts of interest which will or reasonably may compromise the impartiality or independence of the advisor.
The advisor, or any party in which the advisor has a financial interest, does not receive any compensation or other remuneration that is contingent on any client's purchase or sale of a financial product. The advisor does not receive a referral fee or other compensation from another party based on the referral of a client or the client's business.
