How Fee-only Advisory Services Help Cooke Keep Your Financial Interests At Heart

The financial field is full of diverse professionals, including stockbrokers, money managers, and wealth management or financial advisors. Each profession's focus is different, and each can be compensated differently for the services they provide.

A stockbroker typically buys and sells shares of stock for their clients. Money managers analyze financial portfolios for individuals or companies. Both of these professionals generally make money on each transaction they facilitate.

Financial advisors, by contrast, often help people plan their lives. These professionals talk with you about real estate, insurance, college funds, retirement, and taxes. They're long-term partners who help you set and achieve financial goals.

Stockbrokers and money managers often receive commissions on their trades, but financial advisors can be compensated one of two ways — by charging a fee or by earning a commission.

A fee-only financial advisor charges a specified fee to their clients regardless of how well their assets performed that year. A commission-based financial advisor earns a commission on the sale of a product such as a stock trade. Some agencies combine the two payment structures and charge a fee plus a commission.

Regardless of their payment structure, all financial advisors are bound by the Securities and Exchange Commission's (SEC) rules' regarding conflicts of interest. Nevertheless, commission-based advisors earn their living selling products, which may color their objectivity. Consequently, these advisors my be tempted to offer advice that's in their own best interests, not yours.

In the financial world, a fee-only financial advisor can help you steer clear of some of the conflicts of interest integral to a commission-driven model.

What Are Fee-Based Advisory Services?

Fee-only financial planners receive a fixed price to create a wealth management plan or provide professional wealth-management advice. Some planners charge an hourly rate while others invoice clients at a flat fee for each item on their menu of services. Financial advisors who charge a fixed percentage of assets under management (AUM) — often about 1% of the account's value — are also considered fee-only advisors.

Although fee-based advisors and fee-only advisors are similar, there are some key differences in their compensation structure.

A fee-based advisor has a little more leeway than their fee-only colleagues. These financial professionals may charge a mix of flat fees, commissions, and/or percentage of AUM. Most financial advisors who manage money directly operate under the fee-only model, usually a percent of the assets managed.

The fee-only model of service is widely regarded as the most transparent, straightforward approach to compensating financial advisors.

What Are The Benefits of Fee-only Advisory Services?

Fee-only and fee-based advisory services offer many benefits to investors.

One major advantage is less conflicts of interest that a commission-based advisor may bring. When an advisor's income depends on selling you a financial product, their advice is likely to be influenced by the money they can make when you trade or buy their product.

How can you know if a commission-based consultant is recommending an investment because it offers a rich commission to them or because it's in line with your financial plan?

Fee-only advisors do not sell or recommend products based on the financial rewards they will receive. In fact, these professionals have a fiduciary responsibility to act in their client's best interest.

Fiduciary is a legal term, so an advisor with a fiduciary responsibility is required by law to disclose any potential conflicts of interest to their clients. This approach may help protect your assets over the long term.

When you work with a fee-only advisor that person is accountable to you, the client. Knowing that your advisor is on your side, working through the details of financial management with you, can bring great peace of mind.

Most fee-only professionals are committed to achieving your long-term financial goals and objectives. Although they can sometimes be more costly than commission-based planners, a fee-based structure can offer accountability, consistent management, and more customized financial planning.

Commission-based advisors earn their living selling insurance, annuities and trading stocks. Their business model is often built on a series of one-time actions. Buy. Sell. Or hold. They receive little benefit from providing wealth management advice over the years required to build a college or retirement fund.

Since they're paid a flat sum or rate, fee-based advisors typically meet with clients on a regular basis. These professionals should have your best interests at heart, and they want to keep you updated about important changes that may affect your portfolio. Your fee-based advisor will generally advise you about more than just stock trades. They'll guide you through the choppy waters of wealth creation and management.

Your relationship with a fee-only financial planner should last for many years.

What Are the Potential Risks of Commission-based Advisory Services?

Commission-based financial advisors earn income on the products they sell, which might include insurance packages, mutual funds, or another financial vehicle. The more products they sell or accounts they open, the more money commission-based advisors make.

The clearest potential risk in working with a commission-based financial advisor is the potential for a conflict of interest resulting from the incentive to sell more products to earn more commission and make money.

In addition, clients who choose a commission-based planner may face higher overall costs and reduced stability in their portfolio.

An advisor who makes money on each transaction is more likely to encourage clients to buy or sell more frequently than a fee-only advisor. In addition, some asset managers might be tempted to put your money to work in high-risk areas that compensate them more but do little — or nothing — to grow your wealth.

Reach out to your financial advisor at Cooke Wealth Management for fee-only advice that you can trust.