Fee-Only Financial Planning
Objective And Unbiased Advice
A Fee-Only Advisor is defined by NAPFA (National Association of Personal Financial Advisors) as an advisor who is compensated solely by the client with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product. Neither a NAPFA member nor related parties may receive commissions, rebates, awards, finder’s fees, bonuses or other forms of compensation from others as a result of a client’s implementation of the individual’s planning recommendations. “Fee-offset” or fee based arrangements, 12b-1 fees (see below), insurance rebates or renewals and wrap fee arrangements that are transaction based are examples of compensation arrangements that do not meet the NAPFA definition of Fee-Only practice.
Fee-Only Compensation is of critical importance as the advisor is not dependent on commissions or other forms of compensation based on their client acting on their recommendations. Since such compensation creates an inherent conflict of interest and cannot be considered objective and unbiased. This is true even if the advisor truly believes that he/she has only the best interests of the client at heart. Surprisingly, the vast majority of financial advisors in the United States are sellers of financial products. Some or all of their income, such as in a fee-based, or compensated arrangement, may be dependent upon their ability to steer their clients to a limited number of the thousands of financial products available today.
Even if you put aside the conflict-of-interest factor, the limiting of choices, in and of itself, often is enough to impact the quality of the investment advice. These advisors (sellers) include stockbrokers, analysts, insurance agents, some accountants and some attorneys, and most financial planners. Most of their clients are not aware of their advisors’ dependence on and often obligation to selling products, or do not recognize its significance in relation to the execution of their financial plan.
NAPFA believes that many of the problems that beset Americans today in their financial affairs – including the mismanagement of debt, failure to protect retirement assets and poor allocation of savings and investments – relate directly to the conflicts of interest that pervade the marketplace.
A Fee-Only Advisor, on the other hand, provides peace of mind that they are objective, unbiased and free from any conflicts of interest. They have access to thousands of no-load and low-load products and also to many discounted services. They are not limited to company-sponsored offerings or obligated to sale-driven opportunities.
12b-1 Fees: Fees mutual funds charge to promote sales of the fund’s shares through advertising and marketing programs.
