personal finances

The disadvantages of fee-only financial planning

By Lisa Copely 1 June, 2023 2 mins read

Fee-only financial planning comes with a host of drawbacks. Read on to learn about Fiduciary standards, the advantages and disadvantages of fee-only financial planning, and alternatives. You should ultimately decide if this model is right to you. It all depends on what you are looking for in your financial planner. You could choose a financial adviser based on experience and their qualifications. Or, you may prefer someone with a specific focus.

The disadvantages of fee-only financial plan

When you choose a fee-only financial planner, you can expect to pay higher fees. These fees can be one-time and ongoing. You may also have to pay the advisor with your assets or checking account. It can be difficult to estimate the true cost of services if fee-only financial advisors charge commissions. Working with a fee only financial planner is more affordable. However, there are downsides.

Another downside to fee-only financial planning is that they tend to offer fewer services. They may not be able recommend specific money moves such as repaying a mortgage. They are also less likely not to recommend certain investments, such as guaranteed-insurance products. These products are backed up by the claims-paying capability and strength of the issuing institution. Fee-only advisors might not be able to recommend a portfolio that is diverse.

Fiduciary standard

No matter their title, financial planners must follow the fiduciary standards of care. This means that regardless of their title, whether they are a financial planner, investment advisor, portfolio advisor, or wealth manager, they must act in your best interest. You should not work with someone who fails to meet this standard.

The National Association of Personal Financial Advisors, (NAPFA), is the nation's leading professional association for financial advisors who charge a fee. It is made up of highly qualified, fee-only financial advisors who follow the fiduciary standard. NAPFA members must also take a strict fiduciary vow and complete significant continuing education every year.

Fee-only financial planning firms are not associated to brokerage firms or insurance companies. This means that they are legally required to act in the client's best interest. Clients can hold financial planners to a higher standard due to their transparency.

Alternatives for fee-only financial planning

There are pros and cons to both fee-only financial planning and commission-based financial planning. The former offers transparency in compensation and ensures financial planners work in client's best interest. Fee-based firms still operate with the best interest of their clients, but they may have a financial incentive to recommend particular products. Your choice may be affected by factors such as the cost of products, geographic location, and personal relationships.

By taking a holistic approach to their finances, fee-only financial advisors aim to help their clients reach their financial goals. They can help with your investment and insurance needs. Fee-only financial planning can be a good choice for many people due to its goal-oriented nature, but it is not for everyone.

There are also subscription-based models. These fee models allow financial advisers to offer financial planning services but have lower AUM fees. These are good for prospective clients who have only a few inquiries and don’t want to get a complete financial planning package.

FAQ

How to Choose An Investment Advisor

The process of choosing an investment advisor is similar that selecting a financial planer. Experience and fees are the two most important factors to consider.

This refers to the experience of the advisor over the years.

Fees are the price of the service. These fees should be compared with the potential returns.

It is important to find an advisor who can understand your situation and offer a package that fits you.

What is investment risk management?

Risk Management is the practice of managing risks by evaluating potential losses and taking appropriate actions to mitigate those losses. It involves identifying, measuring, monitoring, and controlling risks.

Any investment strategy must incorporate risk management. The objective of risk management is to reduce the probability of loss and maximize the expected return on investments.

The key elements of risk management are;

Identifying the source of risk
Monitoring and measuring risk
How to reduce the risk
How to manage risk

What is wealth management?

Wealth Management refers to the management of money for individuals, families and businesses. It covers all aspects related to financial planning including insurance, taxes, estate planning and retirement planning.

Statistics

A recent survey of financial advisors finds the median advisory fee (up to $1 million AUM) is just around 1%.1 (investopedia.com)
As previously mentioned, according to a 2017 study, stocks were found to be a highly successful investment, with the rate of return averaging around seven percent. (fortunebuilders.com)
According to Indeed, the average salary for a wealth manager in the United States in 2022 was $79,395.6 (investopedia.com)
According to a 2017 study, the average rate of return for real estate over a roughly 150-year period was around eight percent. (fortunebuilders.com)