In our previous blog, we discussed some of the criteria that can help you select a financial adviser that will be the best fit for you. One of the items mentioned was the fee schedule used by the financial planning firm. If you are unfamiliar with what a fee schedule is and how it works, we’ve put together the following helpful guide to explore the various options and the merits of each. It’s very important to understand which fee schedule your financial advisory firm uses, as this is the model that shapes how advisers are paid. Fee schedules can also influence the advice advisers provide, thus affecting your investment opportunities.
Why a Fee-Only Adviser Might Be in Your Best Interest
“Fee-only” is a term you will likely hear often when meeting with potential financial advisers. Full transparency and objectivity are two of the key guiding principles of this model. The most important takeaway from this structure is that fee-only financial advisers are only paid from the fees they charge their clients. These fees can be structured in several ways, such as retainers, hourly rates, or a percentage of the client’s assets under management. Fee-only financial advisers do not earn commissions. They also do not earn any additional financial incentives by recommending certain financial investments, products, or services to their clients.
Because fee-only financial advisers do not receive any additional compensation for recommending specific products over others, they are able to provide their clients with unbiased advice. They can remain objective and personalize their recommendations to each individual client and their specific financial goals.
Fee-only financial advisers are also very often fiduciaries. If you are a GDS Wealth Management client, you have likely heard us talk about our fiduciary duty. It is something that is very important to our team, and we hold ourselves to the highest fiduciary standard. Being a fiduciary means that financial advisers are held to a high ethical standard and are legally obligated to always act in their clients’ best interests.
Finally, fee-only advisers are very straightforward in their fee structures. There are no hidden or last-minute fee changes; the structure of compensation is fully transparent and outlined from the first meeting. Clients will always know exactly how much they are paying their advisers, and these rates are unlikely to substantially change over the course of the client’s relationship with the firm.
Why Fee-Based Advisers Might Not Be the Right Choice for You
As you interview various advisers, you are also likely to encounter some who are “fee-based.” Notably, fee-based financial advisers utilize a hybrid compensation model. In addition to charging their clients fees, fee-based financial advisers are also able to generate alternative forms of compensation by earning commissions and other fees by selling specific financial products or services to their clients.
With the ability to sell certain products and earn commissions, however, come potential conflicts of interest. This means that a fee-based financial adviser may not always make recommendations that are best suited to the individual client. Instead, the adviser may be motivated to make a recommendation that will earn him a larger commission. This approach to compensation can leave clients in a less than ideal position, as they are not receiving advice that is in their best interest.
Although fee-based advisers can have potential conflicts of interest, they are required to inform clients of these. They are also required to fully disclose their compensation structure. This legally required disclosure ensures transparency that allows clients to make informed decisions about their investments and relationship with their adviser.
Selecting the Right Fee Structure
Ultimately, as we emphasized in our previous blog, the choice of financial adviser is a highly personal one. The fee structure is only one – albeit very important – element to consider. As you meet with various advisers and move towards a decision, we recommend taking some time to consider the following criteria:
Are you concerned about conflicts of interest? If your financial adviser is fee-based, are there any potential conflicts of interest that would directly impact you or your investments?
Is your intended financial adviser a fiduciary? If not, how do they plan to ensure that you are protected as a client? Are your best interests being attended to, or is the adviser more interested in earning higher commissions off your money?
Does your adviser’s fee structure make sense to you? Is it clearly articulated? Are the advisers transparent and forthcoming about their fees?
By understanding the differences between these two models, you can be equipped to make a choice that will serve you and your long-term financial goals. If you have any questions at all about fee structures, fiduciary principles, or choosing a financial adviser, please do not hesitate to reach out to our office. Call (469)212-8072 or visit www.gdswealth.com. We would be happy to assist you.
GDS Wealth Management is an investment adviser in Flower Mound, TX. GDS Wealth Management is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. GDS Wealth Management only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of GDS Wealth Management's current written disclosure brochure filed with the SEC, which discusses, among other things, GDS Wealth Management’s business practices, services, and fees, is available through the SEC's website at: adviserinfo.sec.gov.
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