Why Should I Hire a Fee-Only Financial Advisor?

No matter where you are in life, from starting your career to starting your retirement, working with a financial advisor can make a big difference.

A good planner will help you set goals and create a clear path for achieving them, letting you rest easy knowing that you've got a plan in place.

But finding the right financial planner can be tricky and it can be hard to know where to start.

So here's a suggestion: start by looking at how they're paid.

Fee-only financial advisors have some big advantages over other types of financial professionals that can have a big impact on the type of service you receive. So let's take a look at what exactly "fee-only" means and why you should hire a fee-only financial advisor.

What Does Fee-Only Mean?

The key difference between a fee-only financial advisor and other types of planners is in how they get paid.

A fee-only financial advisor is paid by their clients for the advice they give. This might come in a the form of a monthly fee, an hourly rate, or a percentage of investments managed. But in all cases it is a direct relationship between the client and the planner.

Other financial advisors are paid at least in part by the companies whose products they recommend. As an example, if you buy a mutual fund they suggest, a percentage of your investment will be paid to the advisor as a commission for selling that product to you. The same might be true of any stocks, insurance or other products you buy through your relationship with that advisor.

It can sometimes be hard to figure out exactly how your financial advisor is paid, so if you're unsure the best thing you can do is ask them directly whether or not they are fee-only. If the answer is anything other than an immediate yes, you'll know that at least some of their payment comes in the form of commissions.

Quick FYI: "Fee-based" is not the same thing as fee-only. A fee-based advisor can charge client fees and receive commissions. A fee-only advisor never receives any type of commission.

Why Should You Hire a Fee-Only Planner?

Okay, so fee-only financial planners are paid differently. So what? As long as you're able to get good advice, that's really all that should matter, right?

Well, yes, but that's exactly why this is important. After all, how we get paid influences our behavior. For proof of that, look no further than the last time you groggily woke up with your alarm clock and stumbled through your morning routine on the way to work, even though you wanted nothing more than to crawl back into bed. Was the draw of a future paycheck in any way influential on that decision?

Or you could look at any of the studies showing how a doctor's treatment recommendations can be influenced by the way in which he's paid. The basic premise that financial incentives matter is the driving force behind the movement to start paying doctors based on the health of their patients, rather than the amount of care they prescribe.

So financial incentives are important, and there are several reasons why the way in which a fee-only financial adivsor is paid puts he or she in a better position to offer objective advice.

The Focus Is on the Advice

Any smart professional has to focus first and foremost on the activities that actually pay them. After all, we've all got bills to pay and families to feed.

For a commission-based advisor, that means that the focus is going to be on selling you a product. The advice they give has to be in support of selling you something, otherwise they don't make money.

A fee-only planner is paid only for the advice they give, which means the focus has to be on giving the best advice possible. The happier and more successful you are, the more likely you are to continue paying for the service.

The Loyalty Is to the Client

When push comes to shove, our natural loyalty is going to be to the person who signs our paycheck.

Just think about it from the perspective of your own job. If your company has a customer asking one thing of you but your boss is asking another, who are you more likely to side with?

And you probably don't even really think about it exactly in those terms. From your perspective you're simply acting in your company's best interests, which is perfectly natural.

With a commission-based advisor, it's the financial companies making the products that pay their salary. With a fee-only financial adivsor, you're the one who's paying the bills. Which one do you think is more likely to be on your side?

All Potential Solutions Are on the Table

When it comes to recommending specific investments or insurance products, commission-based advisors are limited to products that pay a commission (assuming they want to make money). And they're often even further limited to the products that the company they work for can sell.

Fee-only advisors have no such limitations. Since they will be paid the same either way, they can recommend a product regardless of whether there's a commission involved or which company offers it. With more options at their disposal, they have more freedom to choose the one that's best for your specific situation.

Not only that, but it's been shown that commission-based investment products actually perform worse than those without a commission.

So which would you prefer: an advisor who's only way to make an income is to sell you inferior products, or one who's paid to choose the best possible solution, no matter where it's coming from?

They Chose This Route with You in Mind

Most fee-only financial planners I know purposefully chose the fee-only route because they genuinely believe that it's the best way to put the client and the advisor on the same side of the table. They feel like it allows them to provide their clients with the highest possible level of service.

And it's nice to know that your financial planner had your interests in mind when setting up their business.

Tilt the Odds in Your Favor

There's certainly no guarantee that the way in which a financial planner is paid will determine the quality of the advice they give. You still have to do the work yourself of finding an advisor whose style meshes with your own.

But choosing a fee-only planner certainly tilts the odds in your favor. You simply have a better chance of finding someone who's truly dedicated to giving you the best advice possible.

About the Author: Matt Becker is the founder of Mom and Dad Money, a fee-only financial planning practice dedicated to helping new parents build happy families by making money simple. His free time is spent jumping on beds and building block towers with his two awesome boys.