Let’s not mince words: If you are investing using a financial advisor, you need to know whether or not the financial advisor you’ve selected has your best interests at heart.
With any financial endeavor, the mission is obviously goals-based growth and protection of your assets. How that growth is achieved, however, is often ultimately left at the discretion of the financial advisor.
What motivates a financial advisor, then, is important to understand.
Before you decide to use a financial advisor, you need to ask some crucial questions:
- How does this financial advisor get paid?
- Do they have financial products they want to sell you?
- What is their investment philosophy and why should you trust it?
- Are they acting as a fiduciary on all of your accounts at all times?
In this article, we’re going to explore these questions a bit closer, starting with:
How a financial advisor gets paid
Fe, fi, fo, fum — it might sound like we’re just playing with semantics when we chat about the difference between a fee-only financial advisor and a fee-based advisor. But don’t write it off, because knowing the difference will help you make an informed decision that significantly impacts your financial future.
With that, let’s dive in:
Most financial advisors are paid on some combination of a fee that’s based on the balance of your account plus commissions earned from the sale of financial products or transactions. However, you have the opportunity to choose a financial advisor – like us – who operates on a fee-only basis.
Let’s take a closer look at a fee-only financial advisor and whether or not you should use one.
What is a Fee-Only Financial Advisor?
A fee-only financial advisor is someone who has taken a fiduciary oath to put your interests first at all times, on all of your accounts and in all interactions:
A person or organization that acts on behalf of another person or persons, putting their clients’ interest ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary thus requires being bound both legally and ethically to act in the other’s best interests.
As fiduciaries at Hendershott Wealth Management, that means our wealth management clients never pay commissions, and are never taken by surprise with any front-end or back-end costs or hidden fees.
In other words, we are compensated only from what you pay us, and not by any other banks, brokerages, or financial institutions who might have an interest in the transaction.
While a fee-based advisor that’s registered with the SEC is bound by fiduciary duty when acting as an advisor, they often sell products on commission based on partnerships, not your best interests.
With fee-only advisors, there are no hidden fees or potential conflicts of interest, meaning there are no outside forces or relationships with other professionals or institutions impacting the transaction with you.
One of the main reasons many investors prefer using a fee-only advisor like us is because of the trusted nature of the relationship it creates.
We have no products to sell you, we simply earn our fee – from you – to give you the best advice we know how to give.
Imagine you visit a doctor who gets paid by a pharmaceutical company to prescribe their medication. Then, you see a health consultant who takes into account your entire medical history and goals before recommending a comprehensive plan including diet, physical activity, and medications, if needed.
Who do you trust to truly put your best interests first?
Working with a fee-only advisor puts your needs at the forefront of the relationship. We give you the advice we ourselves follow, and if that advice involves you purchasing financial products such as insurance products or estate plans from an attorney, you can be confident we earn no money from making that recommendation.
In this way, the financial advisor can help you – the client – choose the products that are best suited for you and your goals, without any bias. You don’t have to worry about kickbacks, bonuses, or conflicts of interest due to hidden incentivization.
No surprises. No hidden charges. Just full transparency. We like it that way – and we know you will, too.
How do Fee-Only Financial Advisors Get Paid?
Fee-only fiduciaries are acting only with your best interests at heart. And, we still need to get paid.
As mentioned earlier, the most common method for financial advisors (not necessarily fiduciaries) was traditionally through commissions or referral fees. However, that created a bias in favor of financial product companies instead of the client because the advisor was incentivized to sell products or services to earn commission – even if it wasn’t in the best interest of the client.
Remember The Wolf of Wall Street? It told the story of the biggest malpractice committed against investors – when brokers convinced investors to constantly buy and sell stocks to earn their commissions. This is known as account “churning”, and it made the brokers rich at the cost of their clients.
Enter: Fee-only advisors.
A fee-only advisor can get paid several different ways:
One way a fee-only financial advisor gets paid is by a flat-fee or tiered fee. This is often a monthly or annual fee charged by the advisor. Sometimes, the financial advisor may have asset minimum requirements, but not always.
This is fairly straightforward. The financial advisor would charge an hourly fee to provide advisory and investment services.
Percentage Based (the most preferred fee-only method)
While fee-only financial advisors provide an array of fee types, the one most preferred by higher net worth individuals is percentage based.
Percentage based is exactly that: It means charging based on a percentage of your account balance, determined from the total balance of the accounts that we manage on your behalf. This method links you and your advisor’s fates together.
When you succeed, we succeed.
As opposed to earning commissions, where an advisor sees an immediate return from selling you a specific product, the percentage-based model motivates us to help grow your investments over the long term. Win/win.
A common percentage-based fee is approximately 1% of your account balance on an annualized basis (or per year). However, in the case of high net worth individuals it often makes sense to work with a tiered-fee structure. That means as your asset values increase, your fee percentage for each tier of assets decreases. (More on that, below.)
We prefer this method because it allows us to take a white glove, world-class investment approach to managing your wealth, working closely with your attorney, CPA, and other advisors to make the best decisions for your financial future.
And in turn, you get a personalized portfolio that’s low cost, high performing, well-diversified, evidence-based, and appropriate for any market cycle.
Our Approach as a Fee-Only Fiduciary Financial Planner
At HWM, we use a tiered approach, as illustrated below:
Up to $2M
$2M - $5M
$5M - $10M
Up to $500k
$500k - $1M
$1M - $5M
|Combined Fee Rate
Up to $500k
$500k - $1M
$1M - $2M
$2M - $5M
$5M - $10M
**NOTE: At our discretion, we may offer a different fee schedule.
Why negatively-tiered fees are a positive for investors
You’ll see in our fee chart that the percentage decreases as assets increase. It works this way for a number of reasons, but what matters most to you is that you’re not penalized for your account growth.
Any honest advisor will tell you it doesn’t take 4x the time to manage a $10M account as it does a $2.5M account, despite—in most cases—the complexity of your financial life increasing as your net worth increases. A negatively-tiered fee structure means you won’t get gouged as your net worth goes up, and we won’t go broke making you rich.
A Costly Mistake: Fee-Only vs. Fee-Based
Don’t confuse fee-based advisors with fee-only advisors.
As mentioned, fee-only advisors charge a specific fee for the services they provide.
Fee-based advisors charge a fee for services but can get paid on commissions as well, meaning they may not have your best interests at heart.
We could go on for days about the back-door dealings and other heinous acts committed by unethical advisors but this is a blog post, not a book. The point is that commissions are rarely transparently disclosed with fee-based advisors. If you choose to work with one, you might think you’re only paying a fee, when in reality, you may be paying up to double the fees you know about in the form of commissions.
If you are looking for a strictly fee-only advisor, make sure you clarify this important distinction.
Bottom line: Why Use a Fee-Only Financial Advisor?
The main reason to use a fee-only advisor is that their highest priority is you.
They are not incentivized to sell products pushed by a certain company, but products that are best suited for you and your goals. This is especially true if the advisor is a fiduciary, who is legally required to act in your best interest.
You can also use a fee-only advisor to help you better plan financially.
Since they offer an objective opinion not motivated by any commissions, you can trust their advice. They can be a great resource to help with a full financial plan or a simple financial review — and, if they operate like we do at HWM, this doesn’t come at any additional cost to you.
Overall, fee-only financial advisors often have a much wider range of options, vehicles, and services that we can offer our clients. Since we aren’t tied down to or specifically partnered with any products or companies, we can recommend the ones that best suit your needs – not the ones that line our pockets.
A Fee-Only Financial Advisor You Can Trust
Nine times out of ten when we engage with a potential client and ask about their experience with their past financial advisors, they describe a level of mistrust.
The mistrust stems from their expectation of what they should get, and what they actually get.
At the risk of being corny, here’s what we can promise you: It is possible to find a financial advisor that you deeply trust, who is transparent with you every time, who shows up when they say they’re going to show up, does the work they say they’re going to do…
And who delivers what they say they’re going to deliver.
Trust is at the core of what we do at Hendershott Wealth Management.
If you’re ready to talk to a fee-only fiduciary financial advisor who can help you better understand the different financial plans and investment options available to you and which one is the best choice…
We’re here + can’t wait to get to know you.
There is no obligation to work with us. This is simply starting a conversation that will empower you to make more informed choices.
We’ve said it before and will say it again (and again!): Your finances are your future, and who you work with matters.
Want more? (We knew you were smart.) Keep reading + listening with more from Hilary Hendershott, CFP®, MBA here:
- What is a Fiduciary? More importantly, why should you care?
- Choosing the Right Financial Professional: Understanding the Differences Between a Financial Advisor and a Fiduciary
- Episode #157 of Love, your Money: What Does a Financial Advisor Actually Do?