Let's start by identifying these two types of financial planners.
A FEE ONLY financial planner creates financial plans for clients, and receives fees from those clients to perform this service. They may also manage your money and receive fees for this service as well. They DO NOT make commissions on investments or insurance.
A FEE BASED financial planner creates financial plans for clients, and receives compensation in various ways, such as fees from the client for planning and/or managing investments, and/or commissions from the sale of investments and/or insurance.
So when you are looking for a financial planner, what type of compensation structure would you prefer the financial planner have? Most people would say (I presume) they want their financial planner to be FEE ONLY, because if the financial planner recommends an investment, which pays a commission and the financial planner is a FEE BASED planner, he or she is going to make a commission on top of the financial planning fees, which diminishes the authenticity of the advice or at least the appearance of the authenticity.
Or perhaps the FEE BASED planner offers free financial planning in order to attract clients, and they make it up in commissions on the back end. This should send a clear signal that the financial planning aspect is not so important from that particular "financial planners" perspective. So it's pretty easy to conclude that a FEE BASED financial planner has inherent conflicts of interest for which state and federal regulators are highly attuned.
So you know you are now searching for a FEE ONLY planner, because it seems to be the lesser of two evils, right? I would caution you to tread carefully here. Let's examine why I say this.
There are a lot of places where you can read about how a FEE ONLY financial planner puts your interests first and only does what is in your best interest. Sounds good, but is it really true? Here's a question for you...
How much does a FEE ONLY financial planner charge for his or her services? It's a fair question. What I'm saying is the appearance of moral high ground might be a mirage. Here's another question for you...
If a FEE ONLY financial planner recommends you obtain some kind of insurance policy or create an estate plan, does that person provide you a list of insurance advisors or attorneys to help you execute that portion of the financial plan? If so, that is called a referral. And in the real world, referrals go both ways. So if your FEE ONLY financial planner is referring you to a list of resources, don't you think he or she is expecting those resources to reciprocate? Reciprocity is a form of compensation. Referrals are a CONFLICT OF INTEREST. It also seems a little disingenuous, because the FEE ONLY planner appears to be helping the client. That may be the case, but let's not pretend that the FEE ONLY planner will continue to provide referrals to people who don't reciprocate to some degree.
So if you pay several thousands of dollars for your financial plan and the FEE ONLY financial planner refers you to other professionals, who will also make fees and/or commissions, is that really in your best interest? Do FEE ONLY financial planners ALWAYS have the moral high ground, or could it sometimes be a mirage?
So which category does Carrano Financial Services fall into? The answer.....neither or both. You choose. Let me lay out my reasoning so you can get a clear understanding of how we view things.
I don't believe one is better than the other, with the exception of commission based investments on top of investment management fees. I don't think a client is getting value when you charge commissions on top of investment management fees, and especially in addition to financial planning fees. That seems abusive in my opinion.
But other than that, I think it is a case by case situation. Some FEE ONLY planners offer reasonable pricing for their services. The same can be said for some FEE BASED planners. I think the more transparent the financial planner is in terms of compensation, the easier it is to evaluate the level of value you may get and the level of trust you may have in that person.
The way I view the position of a FEE ONLY financial planner is that he or she should not be managing your investments or handling your insurance matters. They should only be your financial planner. The reason I say this is that perhaps a FEE ONLY financial planner will recommend a complex investment strategy to appear as an expert and also to make the client feel like there is some justification for paying the management fees. In my opinion, people tend to let their guard down in terms of how they perceive a FEE ONLY planner. This is because there are organizations in the industry that promote FEE ONLY planning and the "ideals" of the FEE ONLY planner. And in doing so, FEE BASED planning is made to look like the lower form of financial planning. I just don't think it's that cut and dry.
The way I view the position of a FEE BASED financial planner is that he or she may have expertise in other areas, such as investment management or insurance services and feels competent in offering these services as part of his or her suite of services. Is there a conflict of interest due to the fact that a FEE BASED financial planner will make a commission on the sale of an insurance policy that he or she recommended in the financial plan? Yes, of course it is a conflict of interest. But at least you as a client know this going in.
At Carrano Financial Services, we offer both a FEE ONLY model as well as a FEE BASED model. With the FEE ONLY service, you only get a financial plan. The financial plan will have a variety of recommendations for investments, insurance, taxation and estate planning. However, we will not manage your investments, sell any insurance to you or refer you to any other professionals in order to execute the financial plan recommendations. This is our vision of what a FEE ONLY financial planner should be.... ZERO CONFLICTS OF INTEREST.
Our FEE BASED financial plan will also come with a variety of recommendations for investments, insurance, taxation and estate planning. The question you may be asking yourself right now...."Would your recommendations be any different if I were a FEE ONLY client?" The answer to that is one... you will never know for yourself, but more importantly, two... when the state audits our business, that is where the rubber will hit the road. If there is a pattern of differentiating recommendations based on whether or not we could make a commission, that would be a very bad thing for business. We would be penalized, fined and possibly suspended. So although it is a fair question, we personally do not want that kind of trouble.
Our FEE BASED financial planning service comes with investment management and insurance services under our WEALTH MANAGEMENT agreement. We make the following very clear...
WE DO NOT MAKE COMMISSIONS ON YOUR INVESTMENT ACCOUNTS.
WE DO MAKE COMMISSIONS ON ANY INSURANCE POLICIES OBTAINED THROUGH US. This is a conflict of interest, which is why it is abundantly disclosed. And you are under no obligation to obtain insurance or invest through us.
Our fees for financial planning are the same for both the FEE ONLY and FEE BASED models. The one exception being the annual review fees.
In conclusion, we do not feel that FEE ONLY is better than FEE BASED, or vice versa. We offer both a planning only relationship as well as a wealth management relationship. We leave it up to our clients to decide what is best for them.