Fee-Only Vs Fee-Based Planning: Understanding the Differences for Long-Term Success

Fee-Only Vs Fee-Based Planning: Understanding the Differences for Long-Term Success

Confused about the difference between Fee-Only and Fee-Based planning? You’re not alone. Financial planning jargon can be daunting when you’re just getting started.
 

Understanding the difference between Fee-Only and Fee-Based, however, is important and could be the key to your long-term planning success.

What is Fee-Only Financial Planning?
 

Fee-Only financial planners are legally registered as investment advisors and have a fiduciary responsibility to you to create a plan in your best interest. Fee-only advisors cannot accept any compensation as a result of product sales. In other words, they can’t make a commission from specific investments they recommend you purchase. They are paid directly by you – and only by you – either through an hourly fee, a retainer fee, or an agreed-upon percentage of your assets that they manage.

As a result, in most cases, Fee-Only advisors have fewer conflicts of interest. They are more focused on your needs, rather than on selling you specific investments, since their compensation is not determined by sales volume or choice. A Fee-Only advisor will not try to steer you toward commissioned annuities; a Fee-Only planner’s advice must be completely free of attachment to financial products. The role of Fee-Only advisors is to only provide you advice that fits your current financial situation and your goals and therefore not recommend products and services that don’t support that goal and that are not the best choices for you.

What is Fee-Based Planning?
 

“Fee-Based” is a category the brokerage community has created to take advantage of the success – and attractiveness – of Fee-Only advising. Because the terms sound so similar, it’s easy to think they are similar, but there is a major difference between Fee-Based planning and Fee-Only planning.

In Fee-Based planning, the advisor is compensated with a set percentage of your assets instead of a retainer or a flat hourly fee. In addition to that percentage, Fee-based advisors can also accept commissions from financial products, annuities, and insurance products they sell you. Each time you purchase one of those products, their earnings increase.

This leads to a fundamental conflict of interest. Your advisor wants to earn as much as possible while you want someone to provide honest and trustworthy guidance.

If one fund offers advisors a significant commission and another one doesn’t but is better for you and your financial goals, how likely is it that the advisor will forego the opportunity to earn the commission by recommending the better fund?

That is why the legally-binding Fiduciary Rule that Fee-Only Advisors follow is so important: the definition of a fiduciary relationship is one based on trust.

How to Make Sure Your Advisor is Fee-Only
 

Before selecting an advisor, ask how and what their compensation plan looks like. Ask them to disclose what their compensation fees are in writing and whether or not they accept commissions. By choosing an advisor who provides Fee-Only services, you stand a greater chance of avoiding any conflicts of interests. Remember, Fee-Based advisors are obligated by their brokers or by specific deals to sell certain products. Fee-Only advisors are under no such requirements and have a legal, fiduciary, obligation to work for you, and you only.

Brad Sherman
Advisor
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Brad Sherman is a financial advisor and the founder and president of Sherman Wealth Management, LLC, an independent, fee-only, boutique Registered Investment Advisor that make ... Click for full bio

Top Picks in Asset Allocation

Top Picks in Asset Allocation

Written b: John Bilton, Head of Global Multi-Asset Strategy, Multi-Asset Solutions

As global growth broadens out and the reflation theme gains traction, the outlook brightens for risky assets


Four times a year, our Multi-Asset Solutions team holds a two-day-long Strategy Summit where senior portfolio managers and strategists discuss the economic and market outlook. After a rigorous examination of a wide range of quantitative and qualitative measures and some spirited debate, the team establishes key themes and determines its current views on asset allocation. Those views will be reflected across multi-asset portfolios managed by the team.

From our most recent summit, held in early March, here are key themes and their macro and asset class implications:

Key themes and their implications
 

Asset allocation views


For the first time in seven years, we see growing evidence that we may get a more familiar end to this business cycle. After feeling our way through a brave new world of negative rates and “lower for longer,” we’re dusting off the late-cycle playbook and familiarizing ourselves once again with the old normal. That is not to say that we see an imminent lurch toward the tail end of the cycle and the inevitable events that follow. Crucially, with growth broadening out and policy tightening only glacially, we see a gradual transition to late cycle and a steady rise in yields that, recent price action suggests, should not scare the horses in the equity markets.

If it all sounds a bit too Goldilocks, it’s worth reflecting that, in the end, this is what policymakers are paid to deliver. While there are persistent event risks in Europe and the policies of the Trump administration remain rather fluid, the underlying pace of economic growth is reassuring and the trajectory of U.S. rate hikes is relatively accommodative by any reasonable measure. So even if stock markets, which have performed robustly so far this year, are perhaps due a pause, our conviction is firming that risk asset markets can continue to deliver throughout 2017.

Economic data so far this year have surprised to the upside in both their level and their breadth. Forward-looking indicators suggest that this period of trend-like global growth can persist through 2017, and risks are more skewed to the upside. The U.S. economy’s mid-cycle phase will likely morph toward late cycle during the year, but there are few signs yet of the late-cycle exuberance that tends to precede a recession. This is keeping the Federal Reserve (Fed) rather restrained, and with three rate hikes on the cards for this year and three more in 2018, it remains plausible that this cycle could set records for its length.

Investment implications


Our asset allocation reflects a growing confidence that economic momentum will broaden out further over the year. We increase conviction in our equity overweight (OW), and while equities may be due a period of consolidation, we see stock markets performing well over 2017. We remain OW U.S. and emerging market equity, and increase our OW to Japanese stocks, which have attractive earnings momentum; we also upgrade Asia Pacific ex-Japan equity to OW given the better data from China. European equity, while cheap, is exposed to risks around the French election, so for now we keep our neutral stance. UK stocks are our sole underweight (UW), as we expect support from the weak pound to be increasingly dominated by the economic challenges of Brexit. On balance, diversification broadly across regions is our favored way to reflect an equity OW in today’s more upbeat global environment.

With Fed hikes on the horizon, we are hardening our UW stance on duration, but, to be clear, we think that fears of a sharp rise in yields are wide of the mark. Instead, a grind higher in global yields, roughly in line with forwards, reasonably reflects the gradually shifting policy environment. In these circumstances, we expect credit to outperform duration, and although high valuations across credit markets are prompting a greater tone of caution, we maintain our OW to credit.

For the U.S. dollar, the offsetting forces of rising U.S. rates and better global growth probably leave the greenback range-bound. Event risks in Europe could see the dollar rise modestly in the short term, but repeating the sharp and broad-based rally of 2014-15 looks unlikely. A more stable dollar and trend-like global growth create a benign backdrop for emerging markets and commodities alike, leading us to close our EM debt UW and maintain a neutral on the commodity complex.

Our portfolio reflects a world of better growth that is progressing toward later cycle. The biggest threats to this would be a sharp rise in the dollar or a political crisis in Europe, while a further increase in corporate confidence or bigger-than-expected fiscal stimulus are upside risks. As we move toward a more “normal” late-cycle phase than we dared hope for a year back, fears over excessive policy tightening snuffing out the cycle will grow. But after several years of coaxing the economy back to health, the Fed, in its current form, will be nothing if not measured..

Learn how to effectively allocate your client’s portfolio here.

DISCLOSURE:

This document is a general communication being provided for informational purposes only.  It is educational in nature and not designed to be a recommendation for any specific investment product, strategy, plan feature or other purpose. Any examples used are generic, hypothetical and for illustration purposes only. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor’s own situation. 

J.P. Morgan Asset Management is the marketing name for the asset  management business of JPMorgan Chase & Co and its affiliates worldwide. Copyright 2017 JPMorgan Chase & Co. All rights reserved.
J.P. Morgan Asset Management
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