If you are looking to work with a financial advisor, there are generally two different kinds: commission-based and fee-only. These differing compensation structures create a different set of incentives which have the potential to generate vastly different results for you, as an investor. The question is: Which set of incentives work in your best interest?
Here are the three main advantages to working with a fee-only financial advisor.
1. No Conflict Of Interest
A commission-based advisor is in many ways like a car salesman; they only get paid via commission earned on the sale of a product. This means that the more they sell, the more they get paid. However, what they’re selling may pay a high commission and not be in your best interest, and therein lies the potential for conflict.
A fee-only financial advisor collects a fee for their services often as a percentage of the assets under management. This removes any incentive to pitch you certain products which may not align with your goals. An added benefit is that the fees paid on non-registered accounts are tax deductible.
2. Duty To The Client
A fee-only advisor has a fiduciary duty to their clients — not to a broker or a financial institution. In other words, they must always put the client’s best interests first, and cannot sell their client an investment product that runs contrary to their needs, objectives, and risk tolerance.
Commission-based advisors, on the other hand, don’t have to be fiduciaries. This means that they don’t have a legal obligation to their client beyond selling investment products that are considered “suitable”. Their primary duty is to their employer, not their clients.
3. Alignment Of Goals
A commission-based advisor tends to focus exclusively on managing their clients’ investment portfolios. This portfolio-based focus can create a silo effect resulting in other important areas such as tax, estate, or retirement planning being overlooked.
A fee-based advisor takes a much more holistic approach, looking for tax savings at every opportunity, and ways to optimize your accounts for maximum returns. Furthermore, since a fee-based advisor is paid based on a percentage of the assets they manage, this creates a very different incentive. The advisor’s goal is to grow the assets as much as possible, which generally aligns quite nicely with the client’s goal!
If you are interested in learning more about Kevin’s unique approach to personal finance, contact him today. Your better future awaits.