A Fee only and Fee based Financial Advisor
Sachin has worked hard all his life. He is a medical practitioner and earns a handsome amount of money every month. In spite of earning well he usually does not end up saving a lot of money and hardly invests it anywhere. This never bothered him a few years back but now that his commitments towards his family and life have increased, every now and then he wonders what he can do to save some money so he can do the things that he has been delaying for so long.
Like Sachin, we all start our careers with a certain goal in life that usually revolves around finance. We make plans for putting aside a specific sum of money but these plans somehow seem to go awry every time. One unexpected situation and all our plans to save money for those dreams are literally thrown out the window. In such situations most of us just tend to go with whatever is available or suggested to us by well meaning “friends and family”.
So how do you get out of this inescapable loop that keeps haunting you like a ghost? Well, for that you need experts. Someone like the Ghostbusters or in this case your financial advisor.
The first and the most important step in managing your finances is to know your financial advisor.
There are two kinds of financial advisors that you will mainly come across. One is a fee-only advisor and the other a fee-based one. Fee based financial advisors receive their fee from you and also commissions paid to them by a mutual fund company, a brokerage firm, an insurance company, or investment partnership.
However, a fee-only advisor cannot collect compensation from a mutual fund, brokerage, insurance company, or any other such firms other than you. So this means when they give you advice they represent your interests. After all, they get their earnings only when you benefit from their services and it gives you an idea of who they are loyal to.
There are a few things that you need to keep in mind about the two types of financial advisors that you are likely to come across.
- A fee-only advisor is a no commission advisor and receives his engagement fee ONLY from you whereas a fee based advisor is a commission based advisor and receives his fee from you as well as a commission from the company whose products he sells to you.
- A fee-only advisor will use low cost funds in your account and minimize the overall expenses that you pay compared to a fee based advisor who is more willing to take risks with your money, knowing that the potential costs or burden of taking such risks will be borne partly or entirely by you.
- A fee-only advisor has a fiduciary responsibility to pick investments that are best for you however a fee based advisor does not have to disclose their methods of compensation which can confuse the clients on whether the advisor is actually working in their interest or perhaps for a commission.
- A fee-only advisor may charge a percentage of the assets they manage for you verses the fee based advisors who would charge a percentage of the assets they manage for you and a commission on the products that he sells for a firm.
Next time you decide to take help from a financial advisor, make sure you know who you are dealing with. Choosing the right person for the right job can make a big difference in how well your finances are managed. So, don’t just sit there & watch your dreams pass you by when you have people who can make them a reality for you.