The Fiduciary Duty Difference: Why Fee-Only Planners Put Your Interests First

A successful retirement doesn’t happen by accident. It demands careful planning and smart financial choices long before you stop working. A key decision in this process is choosing the right financial planner to guide you through your journey to retirement. 

In this blog, we'll explore the benefits of working with a fee-only financial planner who operates under a fiduciary duty. More and more retirees are turning to fee-only advisors for their unbiased advice, and we'll explore why you should too.

Understanding the Role of a Financial Planner

To understand the role of a fiduciary in financial planning, you need to understand the basic definitions and terminology. 

A financial planner is a professional who helps individuals and families achieve their short and long-term financial goals. This may involve assessing a client’s current financial situation, identifying financial objectives, and developing strategies to meet those goals, such as saving for retirement, education planning, investment management, and risk management.

Some financial planners are CERTIFIED FINANCIAL PLANNER™ practitioners who have met the rigorous requirements set by the Certified Financial Planner Board of Standards. 

Others, while lacking the CFP® certification, may still offer financial planning services. 

Know How Financial Planners Are Paid

One key area where financial planners often differ is in how they are compensated. The Securities & Exchange Commission encourages investors to ‘understand what services you're paying for, how much those services cost, and how the planner gets paid.”

In general, there are two ways a financial advisor gets paid - commission or fees. Here is an explanation of the different types of compensation structures: 

Commission-Based:‍

• Commission-based advisors receive commissions, typically from the buying and selling of securities, insurance, or other financial products.
• They can be employed by brokerage firms, insurance companies, or other financial firms.
• Although some commission-based advisors are fiduciaries, they are not required to be. These advisors are subject to the suitability standard. Suitability, which is less strict than the fiduciary standard, requires an advisor to make a recommendation that is reasonably suitable to a client's situation, but not necessarily in their best interest. Source: Financial Planning Association

Fee-Only:

• A fee-only financial advisor is compensated solely from the fees they charge their clients. Fee-only advisors do not earn commissions or other sales incentives, allowing them to remain objective and prioritize their clients' best interests.

Fee-Based:

• A fee-based financial advisor receives compensation from both sources: commissions and fees. He or she collects a fee for their services, but may also receive commissions for selling a security or insurance product.

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‍Important Note: Be mindful that fee-only financial advisors may still overcharge for their services. As an investor, you need to understand that high fees that are charged by advisors and deducted from your portfolio, can significantly reduce your portfolio’s growth over the long-term. To understand the impact of fees on your portfolio’s growth over the long-term, reference this calculator.

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The Fiduciary Advantage

If you are uncertain about how your financial advisor is compensated, ask for clarification. It is common to mix up fee-based advisors, who may receive commissions, with fee-only advisors, who are solely compensated through a fee. However, it is crucial to understand the important distinction between the two.

The compensation structure of commission-based or fee-based advisors creates a conflict of interest. These advisors have an incentive to recommend financial products that offer higher commissions, even if the product is not the best fit for their client. Although not all commission-based or fee-based financial advisors have ill intentions, it's best to err on the side of caution and choose a fee-only planner to ensure you are receiving unbiased advice.

Fee-only planners have a fiduciary duty to prioritize their clients' best interests. If you desire trustworthy and unbiased advice, working with a fee-only planner is the way to go. This advantage of fiduciary duty ensures that you receive prudent and conflict-free guidance.

Need Help With Your Retirement? 

Work directly with a licensed fee-only financial advisor at Sensible. Schedule a no-strings-attached call today. We would to help you build a retirement you love.
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This blog article is for informational and educational purposes only.
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Sources: 
SEC.gov
Investor.gov
Smart Asset 
Investopedia

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