Fee-based financial planning practices are relatively new entrants in the financial planning arena, having made their appearance within the last fifteen years or so. The move towards charging a professional fee for financial planning advice has gained momentum, and there is now a handful of niche financial planning practices nationwide that are remunerated a professional fee, akin to tax practitioners, attorneys and accountants.
In general, fee-based advisors charge a flat-free, agreed to upfront, for the preparation of a comprehensive financial plan which covers all aspects of a client’s portfolio including investments, retirement planning, risk cover, estate planning and tax. Thereafter, the advisor is remunerated a percentage of assets under advice, with the emphasis being on comprehensive wealth management. Given human nature, it goes without saying that a fee-based structure is a better environment to cultivate planner-client trust. It is inevitable that commission-based advisors are faced with an inherent conflict of interest between providing the most appropriate advice and the fact that a significant part of their income comes from product sales. This creates an opportunity for clients to question whether commission-based products are in their best interests, and this uncertainty can affect the heart of the trust relationship.
In a fee-based financial planning practice, advisors do not accept fees or compensation based on product sales. Truly independent practices will have no affiliation with any insurance company or product house, reducing the potential for biased advice or conflicts of interest to arise. Whereas commission can pull an advisor in a different direction than working for a client, fee-based advisors receive the same remuneration regardless of the nature of their advice. However, the nature of a fee-based advisor’s remuneration structure, being a percentage of assets under advice, provides the advisor with a natural incentive to develop a long-term relationship with the client, and to ensure that the client’s wealth accumulates over time in accordance with his investment goals. Building a client-for-life relationship is the cornerstone of a fee-based practice.
While many commission-based agents or advisors are tied to a specific product or product house, independent fee-based advisors are free to provide advice and recommendations covering the full range of financial products available in the market place. To ensure fiercely independent advice in the client’s best interests, fee-based advisors should constantly research the market for the most cost-effective and innovative solutions. With no inbuilt commissions or incentives, a fee-based advisor can deliver completely unfettered advice which is optimally aligned with the client’s goals and objectives. Product independence allows fee-based advisors the freedom to pick and choose products and solutions specific to each client’s situation, and the ability to tailor-make a holistic solution based on the client’s individual needs.
Depth of expertise is an integral part of a fee-based practice as this ensures that a client can engage on the full range of financial, legal and tax issues pertaining to his portfolio, without having to seek piecemeal advice from alternative sources. The primary fee of a such a practice is designed to cover all the costs of managing a client’s financial affairs. Many of the services performed for clients of a fee-based practice depend on a wholly integrated plan that goes way beyond just investments. The fees include ongoing advice on estate structuring, tax planning, trusts, risk protection and comprehensive annual reviews, with clients enjoying ongoing access to their team of experts with no additional charges.
A fee-based advisor should also act as an essential sounding board for all financial decisions, playing the role of financial mentor, guide and touchstone. The role of a fee-based advisor in guiding a client through the emotional aspects of money and investing cannot be underplayed, especially in our volatile political and economic environment.
Most fee-based practices avoid charging hourly rates as they do not wish to discourage clients from contacting them for advice. Access to one’s professional advisor should be automatic and ongoing, and clients should not think twice before making contact with their advisor. Being remunerated on a fee basis means a financial planner is able to offer a truly objective second opinion, while providing the client with confidence that no monetary compensation is influencing the advice. The professional simplicity of this remuneration structure allows a fee-based advisor to present all the available products and services to a client, safe in the knowledge that the fee will be the same regardless of the advice dispensed. With the success of a fee-based advisor being directly linked to the financial success of his client, an inherent incentive exists to provide the highest calibre of unfettered advice in a transparent environment of mutual trust.
Have a terrific Tuesday.