The Rise of the Fee-Only Financial Planner

A huge shift is underway, with the client in mind.

A wave of change is transforming the financial services profession. The shift has been gradual, but noticeable. Increasingly, financial planners are choosing to be compensated through fees rather than through commissions.

This is a real change from the old status quo. In the days before the Internet and gourmet coffee on every corner, compensation usually resulted from product sales. A client opened up an investment, and the broker who “sold” that investment received a commission as an outcome.

The more informed an investor was, the more he or she tended to be cynical about this arrangement. It was all too easy for a client to regard the financial planner on the other side of the table as a salesperson, rather than a consultant or an advisor.

The presence of commissions also raised the potential for conflicts of interest. While ethical standards demanded that the representative suggest or present investments suitable for the client, certain suitable investments could mean a larger commission for the representative than others.

On the whole, the profession is moving toward a fee-only business model. In this compensation structure, a representative is paid in fees that equal a small percentage of client assets under management. In addition, he or she may charge hourly or per-project fees.

A new retirement account rule is encouraging the shift. The Department of Labor is implementing a fiduciary standard for financial planners who consult IRA owners or participants in workplace retirement plans. Beginning in 2017 (2018, for IRAs), financial advisors and their firms will be asked to commit to that standard (with certain exceptions).1

Many fee-only and fee-based financial practitioners already abide by a fiduciary standard. Registered Investment Advisors (RIAs) and others who work under this standard have an ethical and legal obligation to put the client’s interests ahead of their own.2

For decades, many registered representatives have made thoughtful and conscientious investment recommendations under the suitability standard, by which any suggested investment must be suitable for a client’s needs and objectives. It is no longer an argument of which standard is better, however; the Department of Labor will soon require fiduciary care for all retirement accounts.

Many more financial advisors could soon be fee only. A small percentage are actually fee-only now, meaning that they earn 100% of their income in fees. The DoL rule change is helping to push the industry in this direction, as well as a priority on client relationships.

Decades ago, an inherent problem plagued the traditional, commission-driven brokerage compensation model: the broker did not profit unless the client bought something. That reality affected the client relationship. Even now, traces of this longstanding structural problem linger.

In a fee-only relationship, the emphasis is on financial guidance and investment management rather than product sales. Investment management fees are typically based on account values, and both the client and the financial advisor want the account to grow. Their interests are closely aligned; they can see each other as partners in the effort to build and sustain the client’s invested assets under management.

This business is relationship-oriented; it must be for mutual success. Increasingly, financial services industry professionals are operating fee-only practices with the goal of enhancing existing client relationships and forging new ones.

Citations.
1 – money.usnews.com/money/blogs/planning-to-retire/articles/2016-04-08/the-new-retirement-account-fiduciary-standard [4/8/16]
2 – forbes.com/sites/peterlazaroff/2016/04/06/the-difference-between-fiduciary-and-suitability-standards/print/ [4/6/16]

This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This material was prepared by MarketingLibrary.Net Inc., for Mark Lund, Mark is known as a Wealth Advisor, The 401k Advisor, Investor Coach, The Financial Advisor, The Financial Planner and author of The Effective Investor. Mark offers investment advisory services through Stonecreek Wealth Advisors, Inc. an independent, fee-only, Registered Investment Advisor firm providing investment and retirement planning for individuals and 401k consulting for small businesses. Stonecreek is located in Salt Lake City, Murray City, West Jordan City, Sandy City, Draper City, South Jordan City, Provo City, Orem City, Lehi City, Highland City, Alpine City, and American Fork City in Utah.

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