How Fee-Only Compensation Aligns Advisor and Client Needs

You might think, well, Fiduciary is a fancy word, but wheres the real difference? The real difference is in the way an RIA is (and is not) compensated. A RIA-licensed financial advisor or financial planner earns no commissions on investment transactions made on your behalf. Further, an RIA exists independently from banks and large brokerage firms and is in no way influenced by them when offering investment advice. The combination of these two changes alone goes a long way toward eliminating the huge conflict of interest that has plagued the industry for 100 years.

RIAs must still be compensated and this is where the Fee-Only (sometimes called Fee-Based) method of compensation comes in. An RIA-licensed financial advisor may charge a few different ways, depending on what services are needed.

Typically, the RIA is hired to create a financial plan and then to manage an investment portfolio. Under this scenario, the fee-only method of compensation will be charged as a percentage of total assets under management (usually in the range of 1% to 2% annually). Under this arrangement it is not uncommon for the advisor to provide the financial plan at no charge, including annual reviews and revisions of the plan. The beauty in the fee-only compensation arrangement is that if the advisor wants to earn more money, they must grow the value of your assets! Your needs and the needs of your advisor are in alignment.

In the event that the client only wants a financial plan or to receive some investment advice, the advisor will likely charge either a fixed fee or an hourly rate fee. Either way, in all cases, the fee is known and disclosed up front. There is complete transparency .

The RIA Financial Advisor Sees the Whole Picture

There are many differences beyond compensation methods between RIA-licensed financial advisors and stock brokers who call themselves financial advisors. For example, most RIAs own their own business. Many RIAs actually started out as stock brokers and decided to go through the rigorous RIA certification process to be able to work apart from what they saw as unethical business practices at their prior place of business.

One big difference between the two is that an RIA is mostly concerned with the big picture of your life and that of your family. This is why they almost always offer comprehensive financial planning services. They understand that your investment portfolio exists to support your goals in life. They want to know what these goals are and to help you plan to achieve them. Theyre looking for a long-term, prosperous relationship. Even an ethical stock broker will still mostly concern themselves with choosing good investments to sell you, but wont know if these investments are the best selection to support you on the road to achieving your goals in life.

In Closing

The best way to know what fee-only is, is to know what its not. Fee-Only means no commissions. It means that fees are disclosed and transparent. The fees are usually charged at an hourly rate or on a fixed-fee for small projects, or as a small percentage of the value of assets under management for long-term relationships. As such, the goals of the financial advisor and client are in alignment and conflicts of interest removed.