What is a fee-only financial advisor?
In an industry that is known for confusing people for material gain, I’m going for absolutely clarity. In this blog, I’ll present a clear, easy explanation of what exactly a fee-only financial advisor is and why you should work with one instead of a broker.
But first, a little background.
Hello! I am Michael.
As an advice only planner for mid-career professionals in New Jersey, my goal is to help people build wealth and achieve their life goals. Here are some blogs we’ve written on this, which you may wish to read.
Is a Roth Conversion really necessary?
How retirement benefits are taxed
Now let’s get on with it!
What is professional financial advice?
Let’s start at square one.
A financial advisor is a person or entity who provides professional financial advice, which is defined as a recommendation of set of recommendations about what to do specifically regarding your personal financial situation, and is paid a fee for those recommendations.
Now, what qualifies as professional financial advice?
Ask yourself these questions to figure out if what you are getting is actually professional financial advice:
Did I pay for this advice?
Was the advice rendered specific to me, or was it a general, blanket statement that could have just as easily applied to someone else?
Did I pay for recommendations (defined as a set of directives to carry out certain actions) that was derived from analysis of my personal situation (as opposed to paying for a product)? In short, did I pay for a set of directives, arrived at through analysis, or did I pay for a product?
Let’s look at some scenarios.
Is the financial journalist who writes an article about the merits of private real estate in general, acting as a financial advisor?
No. This article consists of general guidance and blanket statements, not advice specific to you.
Is the Facebook group for retirees where people post questions and receive responses back from the community, financial advice?
No. There is no fee rendered.
Is the insurance agent who recommends you buy a whole life policy to provide you with “guaranteed income” (lol) a financial advisor?
No. This is a product sale, not a set of directives.
Is the guy who analyzed my personal situation and created a set of portfolio recommendations and a financial plan for a fee, a financial advisor?
Yes.
Now that we’ve knocked out the scenarios in which you are not receiving professional financial advice, let’s talk about how to actually get professional financial advice from a fee-only financial advisor.
What is a fee-only financial advisor?
If you take one thing from this blog, please pay attention to this important message.
The only type of acceptable financial advisor is an Investment Advisor Representative (IAR) who charges a fee – not a commission, but a fee. For this reason they are also called “fee-only advisors.”
But let’s back up even, from here.
A commission a one-time charge that a salesperson receives from selling a product. A person who is compensated by commissions is a broker.
A fee is charged for the provision of a service.
The critical distinction here is product vs. service.
Professional financial advice is a service rendered through a process; a product is not financial advice.
Why brokers are not acceptable to work with
When you work with a broker, you are paying for a product. A product is a product, an instrument, a security that trades on the market.
A product is not financial advice, which his defined as a set of recommendations derived from an analysis of your situation.
A product is not a financial plan.
A product is not professional financial advice. A product is a tool that is used to complete the process of rendering financial advice; it is not the advice itself.
Many brokers might do an analysis for free in order to compel you to buy their product, but by the definition of financial advice you are not paying for a set of recommendations derived from analysis.
Again just to be totally clear: If you are paying for a product, you are not getting professional advice, you are getting sold a product.
A broker works on transactions, not relationships. They may have a relationship with you, but the relationship does not entail ongoing monitoring of their products. So essentially it’s strung together and disconnected with no logical flow. They’ll never admit that, though.
They’ll say that it is beneficial to work with them this way, because it means that you don’t have to pay for the ongoing monitoring that happens in between product sales. Well, the assumption is that you don’t need help in between product sales because everything is hunky dory. But in reality there is no “highlight reel” for your life. They are just making you feel this is an appropriate way of working together, which it’s not, by downplaying the behaviors and decisions that influence your wealth. One time products don’t make you rich; the decisions you make and the way you behave make you wealthy gradually over time.
Brokers want to influence you to overlook that all that stuff. Don’t fall for it.
Don’t work with a broker. They are unacceptable.
You can find out if someone is a broker by searching for their name on the FINRA website.
Work with a fee-only advisor (not a broker)
To make it absolutely clear: You should ONLY work with a financial advisor who:
Works at an RIA firm
Is not registered with FINRA; is only registered with the SEC and not FINRA
Is not a registered insurance agent in any state and does not receive commissions for the sale of policies
Does not accept commissions for sales of investment products, even some of the time
If the advisor you are talking to does not meet the above stated criteria, do not work with them. Work with a fee-only financial advisor; this is the only type of financial advisor is it acceptable to work with.
What is a fee-only financial advisor?
A fee-only advisor is an Investment Advisor Representative (IAR) who charges a fee – not a commission, but a fee. They are registered with the Securities Exchange Commission or with their state regulator. If you meet someone who says they are a fee-only advisor, look them up on the IAPD site to see how they are registered.
Now, there is nothing to say that a fee-only advisor could not ruin your life. Any financial advisor could ruin your life, irrespective of how they charge. It’s up to you to filter them out In future blogs we will drill down further to talk about how you can tell if a financial advisor you meet is worth considering or not.
Putting it all together
Thanks for reading this blog clarifying what a fee-only financial advisor is.
Just for the purposes of full disclosure, I might be slightly biased on this topic because I am a practicing fee-only financial advisor. If you are seeking to work with someone like me, here’s more about how I help people.
As an advice only planner, we don’t earn a fee based on the amount of assets you have with us. Instead we charge a (flat fee, hourly fee) that is based on the amount of resources and time required to serve you. This is very different from how most other advisors operate. If you’d like to discuss us helping you with your finances, let us know.
If you're searching for a:
Fee-only advisor in Princeton, New Jersey
Flat-fee planner near Princeton, NJ
Retirement planner in Princeton NJ
Fiduciary financial advisor in Mercer County
Advice-only financial planner in Princeton, NJ
…I’d be happy to help.
Thanks for reading!
— Michael
Michael Hart, CFP® is an advice-only financial planner for mid-career professionals in Princeton, New Jersey.
P.S.
We are fee-only, flat fee advisors in Princeton, NJ who help mid-career professionals build wealth. If you’d like to meet with us to discuss retiring in New Jersey, how to create a financial plan for retirement, or any other topics related to your wealth, please set up a time.
Investment advisory services are offered through Advice Only, Public Benefit Corporation, DBA Open Book Financial Planning, a Registered Investment Advisor in the State of CA and in other jurisdictions where registered or exempted (CRD# 334039). This communication is not intended as an offer or solicitation of any financial instrument or investment advisory services. Our current disclosure brochure, Form ADV Part 2, is available for your review upon request and at www.adviceonly.com
