If you are hoping to get your finances on track, hiring a financial planner sounds appealing. But searching for one can quickly get confusing.
You want a financial adviser you can trust so you don’t get blindsided by a conflict of interest; for example, an adviser recommends an investment that costs you more because he gets a commission on it.
Focusing on finding a fee-only financial planner or adviser can make it all easier.
“In the fee-only model, the only person paying the adviser is you,” said Barbara Roper, director of investor protection at the Consumer Federation of America, a nonprofit advocacy group.
Why choose a fee-only planner?
Fewer conflicts of interest. A fee-only adviser “won’t have an incentive to pitch certain products, because they are working off a fee vs. getting a commission for promoting this fund or that annuity product,” says Charles Rotblut, vice president of the American Association of Individual Investors, a nonprofit group that works to educate investors.
While some fee-based advisers might provide “perfectly good service to their customers,” Roper said, “the business model is not designed to support that. They have to work against the grain of the incentives.”
That said, it’s impossible to entirely eradicate conflicts. A fee-only planner who charges a certain percentage of your assets under management, for example, might suggest that you not withdraw money from those accounts to pay off your mortgage early.
Still, that conflict “can be clearly disclosed and easily understood,” Roper said.
Advice is the focus. When advisers are paid for advice, rather than selling financial products, they may be willing to spend more time offering it.
“From our experience, 80 percent of the time we spend with clients, for whom we do comprehensive planning, there’s no need for a product or even to discuss a product, only discussions about making good financial choices in life,” said Reed C. Fraasa, a New Jersey financial planner.
Variety of payment choices. Many fee-only advisers charge a percentage of the amount of money they manage for you; some may work only with clients who have about $250,000 or more to invest.
But there are also fee-only advisers who charge by the hour, have a flat fee for a service or require a retainer. Some even use all of these approaches, choosing the best fee structure for the client.
Andrea Coombes is a writer at NerdWallet. E-mail: firstname.lastname@example.org. Twitter: @andreacoombes.