What is Fee-Only Financial Planning?

The term "Fee-Only" has caused significant confusion for many investors trying to determine how financial advisor, planners, or sales representatives are compensated. Basically advisors are compensated in one of three ways: Commission only (compensation derived entirely by the providers of products sold to consumers); Fee-only (fees paid solely by the client and in which no commissions or compensation is received from other sources; and a combination of fees and commissions. Some terms used to describe this fee and commission compensation format includes: "commission-based", "fees & commission", "fee-based", or "fee-offset" to describe their compensation format. In each of these cases, the planner usually charges both a fee and receives commissions from the products sold.

However, many financial advisors who call themselves "fee-only" actually receive product commissions as well, often with the consumer not aware of those charges. This is often the case with annuity or mutual fund products sold with "back-end" loads or surrender charges.

Why doesn't Pace Financial Services accept commissions?

When an individual selects a financial advisor, beside the expertise, integrity, and experience of the advisor, he or she is looking for objective advice. This advice may be influenced according to how a particular advisor is compensated. We believe that a relatively small percentage of individuals offering financial advise actually get paid exclusively for their advice. The majority earn some or all of their income by the selling of stocks, mutual funds, annuities, insurance, or other financial products to implement their recommendations. We feel that many of these "advisors" are actually financial salespersons who face a financial conflict of interest and are often encouraged to direct clients into products in which they have a financial interest. The greater the advisor's dependence on commission income, obviously the greater this potential conflict of interest.

Becase of how they're compensated, many commission-based planners are unlikely to recommend no-load or low-load products or services or may recommend those investments with higher commissions or special considerations for the planner. Unfortunately too, there is often a direct correlation to the riskiness of a product and the potential commissions to the planner which often results in a riskier investment than would otherwise be recommended.

For several reasons, commission-based financial planning remains very popular because it appears more affordable for the customer because the fee is often "hidden" in the price of the product or along with other "annual fees". As a result, the customer is often not able to distinguish the fee or commission as clearly as compared to an out-of-pocket or up-front fee. (The government relies on a similar "hidden" tax payment structure by having employers withdraw employee's personal income taxes during the year instead of having the taxpayer make inc tax payments "out-of-pocket" at the end of the year).

At Pace Financial Services we believe the focus should be on the benefits to our clients from the planning and services we provide. For this reason, we charge no commissions, but bill our fees directly to our clients. Unlike many commission-based formats, these fees are never hidden and the client is always aware of exactly what he or she is paying. We have enough confidence in the value of our services that we believe the client will willingly pay a reasonable fee for our services. Just as we ask our clients to be open and honest with us about their personal financial situation, we want to be clear and open with our clients about the fees we charge.

Here's what a few well-known financial publications had to say recently on the benefits of fee-only planners:

"The Most important matter is how the planner is compensated. Hire the planner who...has no financial stake in (your) investments."Forbes

"Start with the general practitioner...a Financial Planner (whose) compensation should be from fees alone.", Money Magazine

"Financial Planners who take commissions have a built-in conflict of interest...even with disclosure, my choice would be a Fee-Only Planner.", Newsweek Magazine

At Pace Financial Services we believe the focus should be on what we can do for our clients. And although the fee-only method of compensation is no guarantee to avoid conflicts of interests, we have found such a format to be most effective in leading to a long-term relationship between the client and planner.