Why Does “Fee-Only” Matter When Choosing a Financial Planner?

It’s easy to find lots of personal finance information online. Most of the time, it’s easy to see how it applies to your life. Frugality tips, for example, are very easy to incorporate into day-to-day living and see exactly how they’re saving you money.

When you start moving beyond that and start looking at things like insurance and investments, it starts to get less clear, for two reasons.

First of all, everyone exists in a different personal finance situation. It’s easy to apply most frugality tips to anyone’s life without knowing exactly how their finances are because, well, they work for everyone.

When it comes to questions about specific insurance policies, how to save for future education expenses, and how to save for retirement, you can’t simply take every piece of advice out there at face value. Different solutions work better for different people in different situations, and without someone laying out their full financial plan on the table, it’s basically impossible to say what the best choice is.

Second of all, when there’s a product to be sold, salesmen are in the water. Most salespeople are good people who believe in what they’re trying to sell you. Some, however, will sell you almost anything just to get a sale.

The internet provides a great anonymous forum for those kinds of salespeople. They’ll spin a story about how this specific insurance or this specific investment is the one you need.

Finding unbiased information is the first and most important step to solving this problem. The best way to do that is to read information from a lot of different sources and try to make sense of it as a whole.

The best result is that you feel knowledgable enough and confident enough to make your own financial decisions based on your own situation and what you’ve learned from as many unbiased sources as you can.

However, a lot of people prefer to trust the advice of a financial advisor in those situations, which brings us to another problem: quite a few financial advisors are also salespeople.

If a financial advisor works on a commission, that means their income is somewhat reliant upon people signing up to buy specific financial products.

Now, most salespeople believe deeply in their products. Very few are the kinds of “sharks” that salespeople are depicted to be – the vast majority truly believe in what they’re selling. They believe it’s the best option for you – or at least one of the best ones out there.

The problem is that they have a financial incentive to feel that way if they’re working on a commission-based system.

In the words of Upton Sinclair: “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”

People whose income relies on them selling you a very good product are going to sincerely believe that it is a good product, regardless of whether or not unbiased sources say that it’s a good product or not. They’re going to believe in sources that say it’s good and disregard sources that say it’s bad.

We all do this when it comes to what we believe, and we tend to do it more when there’s financial incentive on the line.

The solution to this is to seek out a financial advisor who isn’t beholden to commissions. While you’re never guaranteed to find one that is truly unbiased, a fee-based financial advisor is one that earns his or her income solely based on the fee you pay them, not on commissions from any products they suggest to you.

On the occasions when I’ve needed to talk to a financial advisor, I’ve sought out a fee-based one first and foremost. Generally, I had to pay to secure anything beyond a very brief discussion, but rather than just slapping a product on the table and telling me that this is what I need, fee-based advisors usually give me a big list of options and, furthermore, they usually explain the ins and outs of each option and how they actually connect to my needs. They can manage things for me if I wish, but the ones I’ve talked to have been happy to just give me a list of suggestions, shake my hand, and wish me well, leaving me to do it on my own.

That’s the kind of financial advice I want, and that’s why I seek out fee-based financial advisors first. While I have no doubt that commission-based advisors truly believe in the products they talk about, I feel much more confident in the words of someone who doesn’t have a financial incentive to tell me about the product. They just have a financial incentive to give me the best possible advice.

Trent Hamm
Trent Hamm
Founder of The Simple Dollar

Trent Hamm founded The Simple Dollar in 2006 after developing innovative financial strategies to get out of debt. Since then, he’s written three books (published by Simon & Schuster and Financial Times Press), contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.

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