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Three financial professionals representing different types of advisory relationships
If you are thinking of working with a qualified financial advisor or planner, there are a few different ways the relationship can look. With those different methods come different availability of investment vehicles, care standards, and outputs. Here are some of the ways you can engage with a qualified financial advisor and how to figure out which method is going to make most sense for you.
Note On Licensing
Please note that when I mention financial advisors, that is a broad term. It doesn’t speak to any specific level of licensing. People with no licenses or just an insurance license and no ability to deal in stocks, bonds, or funds might also call themselves financial advisors. When I mention a qualified financial advisor, professional, or planner, I am assuming a high level of experience, competence, licensing, and standard to which they hold themselves. Certifications like CFP, CHFC, CFA, and CDFA demonstrate added discipline and level of responsibility to clients. You can learn more about the advisor you are considering here.
Types Of Relationships
There are three broad ways you can engage with a financial advisor:
Fee-based: The advisor places assets under management in exchange for an advisory fee. There are no added transaction charges, and the fee covers all planning, rebalancing, and time spent.
Fee-only: The advisor charges you by the hour or by the plan for creating a financial plan for you to follow and execute on your own.
Commission-based: The advisor has you pay per transaction as your plan is implemented, with no ongoing advisory fee.
Let’s say an investor has a financial situation that involves some concentrated stock, some retirement accounts in various places they haven’t looked at in a while, and more cash than they need in emergency reserves. Their goals include purchasing a home in three years and retiring at age 60 but they have no idea how they’re going to accomplish these or how much they’ll need. They do know they’re in a risky situation with the stock but will pay a lot in taxes if they liquidate right away.
This is a perfect example of someone who can benefit a lot from a fee-based relationship with an advisor because a qualified advisor will have access to a variety of vehicles that can de-risk the concentrated stock, save money on taxes now and in the future, continually rebalance, consolidate outside accounts, give access to investments not available inside employer plans, and continually ensure that the investor is on track for their financial goals.
Fee-based relationships also hold the advisors to a high level of care. They both legally and morally must act in their client’s best interest and must keep up a continuous review schedule with their clients. Here are other client profiles that are good fits for a fee-based relationship:
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