The problem with fee-only financial advice

Posted on Posted in Financial Planning

Much is written about the benefits of fee-only financial advice. Yet the drawbacks that prevent its wider adoption among the relatively large portion of working-class affluent individuals are almost totally ignored in public media. The result is that we are sending a harmful message to the bulk of Americans who would otherwise benefit from solid professional financial advice.

Fee-only planning presumes that the client has the resources to find, evaluate, work with and pay the fees of multiple qualified professionals with different specialties, presumably working as a harmonious team. A fee-only adviser is not supposed to be affiliated with those who are paid for executing transactions. It’s a nice idea, but seldom reflects reality. The risks of failure in this approach are significant, especially considering that the net financial results are only as good as the weakest link in that team. An excellent professional financial plan, for example, will be rendered valueless if a broker messes up a key transaction. We could argue that the execution of the advice is at least as important as the quality of the advice itself. Transaction-based professionals know that they are the real rainmakers who bring results to their clients portfolio and may be indifferent to those who talk about results without actually delivering them. We know that competency within the financial advisory profession is not defined by method of compensation.

In today’s real world, the majority of those fortunate enough to be climbing the economic ladder – perhaps because they have a solid career or a growing business – face extraordinary demands on their time and financial resources. They are fortunate to develop a personal relationship and pay one good financial adviser, let alone a team. Most see no need to pay one person for advice and another to execute it. Today’s clients are more likely to rely on emerging Internet-based technologies to efficiently bridge the gap between financial advice and execution or transactions. As a result, most of today’s upwardly mobile individuals say that they hope to utilize the one most competent adviser they know and trust to handle as many tasks as possible.

My take on this topic is simple: fee-only advice is likely the best approach for helping the rich get richer but it is won’t help working class individuals gain a financial foothold on a secure future. In my own practice working with mostly with business owners and working professionals, my clients are best served by me maintaining relationships with multiple types of financial firms who can best “get it done” once we’ve decided on a course of action.

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