Approaching retirement, every financial decision you make matters. As you prepare to enjoy a life of financial independence, knowing you have the right partner and guide in your corner is essential. But did you know that not all financial advisors are created equal? You can learn much about their motivations, intentions, and regulatory standards based on how an advisor is compensated.
Let’s look at what a “fee-only” financial advisor is and why you should work with one in retirement.
A fee-only financial advisor receives compensation solely from his or her client. This model essentially aligns the advisor’s financial well-being with their client’s success.
There are two primary ways in which a fee-only advisor structures their fees:
- Hourly or flat fee: The advisor charges an hourly rate for their services or a flat fee (typically per quarter, month, or year). Hourly rates are standard for short-term engagements, say if a client has a question regarding something specific and isn’t interested in receiving ongoing guidance.
- AUM percentage: Advisors who oversee client portfolios typically charge a percentage based on the assets under management (AUM). AUM fees range broadly, but it’s common to see an AUM fee of around 1%.
It’s also possible for advisors to charge a combination of AUM fees and flat fees. The AUM is strictly for portfolio management and oversight, while the flat fee covers more holistic financial planning services.
Other Compensation Models
Aside from fee-only planning, there are two other common types of compensation models that advisors and financial professionals will use:
Commission-based: The advisor receives a commission or kickback after selling a financial product or transaction (such as a stock trade). With commission-based advisors, the emphasis on actual financial planning will vary. Some offer planning as a secondary service, while others don’t offer it at all.
Hybrid or fee-based: Fee-based advisors may be primarily focused on financial planning, but they want to provide access to products to expand their offerings (such as giving clients access to insurance policies they’d otherwise have to refer out to). This hybrid, or fee-based, model can combine any fee structures (flat fee, hourly, AUM, and commission-based).
The Benefits of Working With a Fee-Only Financial Advisor
The way an advisor gets paid is vital to know. Fee-only, for example, is the only model that fully aligns the advisor’s compensation with your best interest. This is because fee-only advisors are fiduciaries legally obligated to provide advice and solutions in your best interest.
But other types of advisors are not necessarily obligated to withhold this standard, and they can be motivated financially to sell you products that may not fit your needs.
Here are a few of the most significant benefits you receive when working with a fee-only financial advisor.
Objectivity and Unbiased Advice
Because fee-only advisors cannot receive commissions, kickbacks, or referral incentives, they can provide advice free from conflicts of interest. Instead of trying to sell expensive products that aren’t conducive to your financial life, they tailor their advice to address your needs and goals. As a client, this can provide peace of mind in knowing you’re receiving advice in your best interest.
Transparent and Clear Fee Structure
Fee-only advisors are required to disclose how they are paid and if there are any potential conflicts of interest. They will provide you with clear, upfront disclosures of their fee structure. Unlike fee-based or commission-based advising, there are no hidden fees or financial incentives you may not know of.
Understanding Comprehensive Financial Planning
Your financial life is multi-faceted, and each of those facets needs to work together to help you achieve a sound and secure retirement. A fee-only planner can help you take a holistic approach to preparing for retirement by integrating all aspects of your wealth—distribution strategies, tax planning, estate planning, risk management, and more.
Personalized Investment Management
At Partners in Financial Planning, we offer our clients customized investment portfolios based on their individual goals and tolerance for risk. This is especially important near retirement, as people’s risk tolerance tends to decline, and their need for stability and security increases.
Rather than chasing the highest returns or trying to time the markets, we focus on developing long-term strategies emphasizing asset allocation and diversification. And as markets change or your circumstances evolve, we’ll reevaluate and rebalance your investments regularly. Ongoing portfolio monitoring helps us ensure it always reflects your current goals and aligns with your risk tolerance.
Tax Efficiency and Optimization
In retirement especially, tax planning is crucial in preserving your retirement income. Our team, for example, incorporates proactive tax planning and tax-efficient investment strategies that can be used to minimize your tax liability in retirement. In addition, we collaborate with tax planning professionals like CPAs to ensure comprehensive, year-round tax management.
Retirement Income Strategies
Building up a nest egg of retirement savings is essential, but understanding how to draw from it is critical. A fee-only advisor can help you understand a sustainable withdrawal rate based on your anticipated retirement timeline, the market, and desired annual spending.
As we help you develop a retirement income strategy, we’ll look at every source of your retirement income, including Social Security benefits, retirement accounts (401(k), Roth IRA, etc.), pension distributions, etc. Because different income sources have different tax treatments, we’ll consider the potential tax consequences of withdrawals and how to minimize them.
Estate Planning and Wealth Transfer
A fee-only advisor can help you create a robust estate plan or update any existing plans you already have. Keeping in mind the legacy you want to leave and the potential tax consequences of transferring your estate to your loved ones, we work to facilitate a smooth wealth transfer process.
In addition, we can coordinate with estate planning attorneys and other professionals to help ensure all aspects of your legacy plan are accounted for and updated regularly.
Risk Management and Insurance Analysis
While a fee-only advisor won’t sell you insurance policies or products, we can still evaluate your needs and current coverage related to your evolving financial situation. We’ll look, for example, at your health coverage (such as Medicare), long-term care policies, and life insurance policies. Just as it’s harmful to your financial life to be underinsured, being overinsured can also add an unnecessary burden on your resources in retirement.
We’ll look at your existing policies and help you balance cost-effectiveness and adequate coverage.
Ready to Work With a Fee-Only Financial Advisor?
A fee-only financial advisor works solely in your best interest and can address all aspects of your financial world. By offering unbiased advice and comprehensive planning strategies, they can provide personalized support and the reassurance that their advice is conflict-free.
As you continue your retirement journey, we encourage you to reach out to a fee-only advisor, like our Partners in Financial Planning team.
Partners in Financial Planning provides tax-focused, comprehensive, fee-only financial planning and investment management services. With locations in Salem, Virginia and Charleston, South Carolina, our team is well-equipped to serve clients both locally and nationally with over 100 years of combined experience and knowledge in financial services.
To learn more, visit https://partnersinfinancialplanning.com