Why Choose Blue Water Capital Management?
 

What is Fee-Only Financial Planning?

You may not have considered how your financial advisor gets paid, but you should. The way your financial advisor gets compensated can make a significant difference in the advice they give. Even one who is trying to make sound recommendations for their clients can be influenced by choices that would serve their own financial interests over their clients'. What you want is a fiduciary that is bound to give guidance that is in your best interests.

There are three primary ways financial advisors receive compensation:

  • Commission-based

  • Commission and fee-based

  • Fee-only

Commission-Based Model

Any financial advisor who earns their income from commissions does so from the financial products they sell, such as insurance packages, mutual funds, or the number of accounts they open. Commission-based advisors are also not legally required to disclose conflicts of interest. The laws that govern commission-based financial advisors state that the products they sell must only be "suitable" for their clients. Suitability may not conform to the same criteria as a legal fiduciary duty. That means that the advice they give may be adequate for your needs but highly advantageous for theirs. 

Commission and Fee-Based Model

This hybrid model presents additional ways for the advisor to earn money based on the products they steer you to invest in, as well as the pre-stated fees for their services. It has the same drawbacks and caveats as the commission-based model. 

Fee-Only Model

A fee-only compensated financial advisor earns money from the fees charged for their services. This fee may be charged in the form of a per hour, flat fee or fee based on the amount of assets the advisor manages. Some advisors may also require an asset qualification before accepting a client, such as having a minimum of $500,000 in assets. Prices may differ depending on the services provided. Additional financial planning may have a higher fee than traditional investment management. These fees may be annual, quarterly or monthly and are often deducted directly from the investment accounts.

One of the most significant differences in fee-only advisors is a fiduciary duty. Fiduciary duty means that the advisor is legally bound to consider your best interests over any other. Their advice must take your risk tolerance, goals, needs, and objectives into consideration. They are also required to disclose any conflicts of interest, such as any product in which they may have a financial interest. To do otherwise opens them up to legal liability. 

What is the Difference Between Fee-Only vs. Fee-Based?

Be careful of the terminology used in disclosure of how the advisor is being paid. There is a world of difference between fee-based and fee-only. A fee-based advisor may primarily charge a fee for service but, they may also accept commissions based on the financial products they sell you. Because of this they are only bound by the suitability rule, not by fiduciary duty. A fee-only advisor may not accept any commissions from any financial institution and thus eliminates any conflicts of interest and creating a fiduciary relationship.  

The Benefits of Having a Fee-Only Advisor

There is beauty in simplicity. The advisor states the fee required for a service, and then you pay it to receive the benefit of their education, training, and experience. Other advantages include:

  • Transparency - The fee-only advisor will clearly disclose the amounts and services for which the fees are charged. 

  • Flexibility - You may find that your fee-only advisor can customize the costs to your needs, such as per hour rates or a flat fee for asset management.

  • Unbiased advice - A fee-only advisor is not swayed by the lure of a hefty commission for a particular financial instrument, nor are they paid per account. 

  • Fiduciary duty - Most fee-only advisors are fiduciaries. Ethics and rules of law guide them to choose only the financial vehicles that serve your best interests over anything else.

  • Diversification - With the freedom to suggest the best strategy for their clients, a fee-only advisor can research and present virtually any opportunity that potentially gives you the best outcome, even if it isn't in their organization's products or services. Having a well-diversified strategy can minimize risk and optimize ROI.

One of the unstated but natural byproducts of having a fee-only advisor is trust. By having the transparency of stated fees, the understanding that your advisor as a fiduciary is bound legally and ethically to consider your best interests, and the knowledge that they must disclose potential conflicts of interest, you are free to establish a good working relationship. When you know your financial advisor is genuinely working for you, it frees you of the doubt and suspicion that can come from working with brokers paid for what or how much they sell. 

The Benefits of Choosing Blue Water Capital Management

Our team of experienced, certified financial and retirement planning professionals is here to advise and guide based on your best interests. We take great pride in helping our clients reach their financial goals. To get started, contact us today.