Financial advisors charge in two basic ways—they earn transaction commissions on the products you buy or you pay them directly for their time or project. Many people prefer fee only financial advisors because they believe the advisor has greater objectivity as he is not getting compensated for selling a particular product. While fee only financial advisors are common when it comes to investing (properly registered investment advisors), they are scarce in the insurance industry but each year, more commission-free insurance products hit the market and more fee only financial advisors use them.
The fees you pay may be based on different services. For example, you may pay hourly fees like you would with an attorney, retirement planning fees (a project fee for a retirement plan, and asset management fees (e.g. 1% of the portfolio value being managed by the fee only financial advisor). Neither advisors nor affiliates 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. The fee-only model of compensation supposedly reduces the potential for conflicts of interest between the advisor and the client in that the advisor is not beholden to insurance companies, particular investments, and other financial companies.
Since the advisor does not gain from any transaction, the fee only financial advisor has no incentive to tell you to buy when the market is weak, have you move money from a money market fund if that is the most suitable depository at a given time or push one investment or insurance product over the other. The fee only financial advisor working on an investment management fee does have an incentive to tell you to 'hold' during bear markets. If you pull your money out of the portfolio, he stops earning his 1% asset management fee.
Not all investors have access to a fee only financial advisor as they tend to work with wealthier clients. Operating on a fee-paying basis may make the advice too expensive to obtain for the broader market otherwise catered for by commission-based advisers. If a client must pay a flat fee of $1000 to his adviser as a lump sum, this is less manageable for all but the wealthy, rather than the more manageable option of paying through regular charging and commissions. However, it is quite conceivable that an investor pays far more in commissions than they would dealing with a fee only financial advisor because the investors typically is unaware of the commission paid as they are often buried in the product (most notably, insurance products).
In fact, among some investors, there is a common misconception is that financial advisors provide their services for free. Many investors don't understand the hidden costs they pay when an advisor recommends a packaged product (mutual fund, annuity, direct investment). Consider this: making a $50,000 investment in a fund with 5% load would translate into the equivalent of more than 14 hours of portfolio planning at $175 per hour! If you were to hire an advisor for 14 hours at that rate, you could expect him or her to accomplish a great deal of work that would produce a more balanced portfolio, returning a potentially higher rate than the loaded mutual fund. The fee-only type of compensation provides investors with the opportunity to get more service out of the money they spend on professional advice and stock-picking expertise.
Note that major brokerage firms offer fee only financial advisor. However, this advice may not be quite as independent as dealing with an advisor who has their own Registered Investment Advisory firm and is not affiliated with any firm. This independence allows the greatest degree of objectivity.
It is currently difficult to find a fee only insurance advisor who can help you select annuities or long term care insurance. For these products, most professionals charge commissions on the product sale or you "do it yourself" with the assistance of a long term care calculator and annuity calculator.
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i prefer fee financial advisers over the other one
I think the fee based model works not only in investments - if you can find a fee based advisor like you point out above - but also in other areas. In our area of expertise (rental units) for example if you want to find out how extensive foundation damage is on a house, don't call a foundation contractor - they want to sell you their services - rather, pay a structural engineer their fee to give you a report... it will be much more objective... then you can give that report to your foundation contractor and hold them to that amount of work and no more.
I certainly do agree with JCL's argument there. you should always focus on the much more objective approach than the regular stereotypes. And as far as for your article, financial advisers indeed have many hidden cost involved which I think mot of the people are not aware of.
I am using a fee financial adviser too, although we did not miss this financial crisis. But I do not know how to invest myself, so I still think it worth to use a paid financial adviser.
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My dad has an account with Merrill Lynch (or I guess BOA now). His advisor is a great guy. But honestly the financial advice is awful. Not only is he paying performance fees as a % of his assets (not sure what it is exactly) but he's in all these high expense poorly performing mutual funds.
My Mom is looking for a financial advisor and I'm strongly encouraging her to go with an advisor with a set hourly fee.
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Why is it that commission based advisors always get a bad rap? Is there the possibility that some commissioned based advisors really do care about how and where they invest peoples money? What about the insurance companies that also offer broker dealer services and have advisors that hold securities licenses? If you can't tell already I work as a commissioned based advisor with a large company and I always do what is best for my clients regardless of the commission. As a matter of fact I have given up the opportunity to make THOUSANDS of dollars more in commission because it wasn't the right fit for my client and I have done this on numerous occassions.
A fee based financial adviser has thier own place just like the other ones. If you want to do own research and control your investments than i like a fee based one. If you want someone else to decide how to invest then use the other one. You have to look at what they tell you to do with your money and do own research no matter wich one you use.
I believe that most people rather deal with a fee only financial advisor. On the other hand there is an argument to be made about the financial planners who get 100% of their income from their clients, and no money from fund companies. Some people preffer to pay their advisers because this way you know that they are working for their clients interest instead of theirs.
I recommend a fee based broker for people who are on a budget, just be prepared to know that you won;t be able to get everything laid out to you that you might need depending on your needs and requirements.
I think that a lot of people are put off when they see that there is a fee for the service even though it can work out cheaper. A lot of insurance brokers are lowering the commission offered in order to quote competitive rates anyhow so it shouldn't make too much difference as competition increases. In any case, we would hope that advisors are honest so commission shouldn't impact on their recommendations. Thanks.
James
Health insurance broker