How To Determine The Best Financial Advisory Relationship For You

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.

Fee-Based

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:

• Investors who have some assets but don’t feel equipped to manage on their own.
• Investors who want to start learning more about investing.
• Investors who are prone to making emotional portfolio decisions.
• Investors who are fearful about investing.
• Investors who value partnership.
• Investors who have gone through a major life transition.
• Investors who are seeking capabilities beyond what they can do on their own.

Fee-Only

Let’s say an investor has a wealth of experience investing. They’ve read reputable books (not watched online videos) on investing and portfolio theory, they enjoy doing trading themselves, and they do not make brash or emotional decisions in times of portfolio volatility. They have a relatively firm grasp of their goals and feel comfortable with the investment tools at their disposal. However, they want to have someone to map out their goals, review their current portfolio allocations, and workshop a major purchase decision with them.

This is an ideal fit for a fee-only relationship. In a fee-only relationship, the advisor can work with a client on a project-based or hourly basis. Some advisors also offer unlimited access for a monthly charge, making this look a little more like the fee-based approach. However, the advisor will not manage the securities for the client or provide access to unique approaches only available through advisors. The cost per hour can vary greatly between advisors, so be sure to ask their rate at the introduction.

Here are some examples of ideal clients for a fee-only relationship:

• Investors who do not want an ongoing partnership.
• Investors who consider themselves do-it-yourselfers.
• Investors with a wealth of experience investing.
• Investors who have a firm grasp on the scope of what they would like support with.
• Investors who want to assess a single major financial decision.
• Investors who have an outside portfolio manager they would like to maintain.
• Investors who do not need support mitigating their taxes.

Commission-Based

Let’s say an investor just had a baby and wants to get a few things accomplished. They want to move their small Roth IRA, they want to start a 529 college savings plan for their kid, and they want to purchase term life insurance to make sure the child is taken care of if something happens to the investor in the next 20 years.

This may be a good fit for a commission-based relationship because each of these three things are transactions. Oftentimes, fee-based relationships come with certain minimums but brokerage accounts where investors can buy and hold a few funds often have no minimum. 529 plans vary state to state but they involve purchase of mutual funds per time money is contributed. Term life insurance is also a transaction typically requires minimal ongoing management after placed.

Here are the types of investors ideal for a commission-based relationship:

• Investors who do not meet advisor minimums for a fee-based relationship.
• Investors who are extremely fee conscious.
• Investors who do not want an ongoing partnership.
• Investors who have an outside portfolio manager they would like to maintain.
• Investors who know they only want a single transaction.
• Investors who do not want to think about their investments over time.
• Investors who do not need support mitigating their taxes.

Conclusion

Choosing the right financial advisory relationship depends on your investment experience and needs. Fee-based advisors offer ongoing monitoring of the markets and a high level of care, ideal for those needing comprehensive support. Fee-only advisors provide guidance without placing assets under management, suitable for experienced investors seeking specific advice. Commission-based advisors are best for transactional needs. Assess your goals and preferences to decide.

This informational and educational article does not offer or constitute, and should not be relied upon as, tax or financial advice. Your unique needs, goals and circumstances require the individualized attention of your own tax and financial professionals whose advice and services will prevail over any information provided in this article. Equitable Advisors, LLC and its associates and affiliates do not provide tax or legal advice or services. Equitable Advisors, LLC (Equitable Financial Advisors in MI and TN) and its affiliates do not endorse, approve or make any representations as to the accuracy, completeness or appropriateness of any part of any content linked to from this article. CFP® and CERTIFIED FINANCIAL PLANNERTM are certification marks owned by the Certified Financial Planner Board of Standards, Inc. These marks are awarded to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.

Cicely Jones (CA Insurance Lic. #: 0K81625) offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN) and offers annuity and insurance products through Equitable Network, LLC, which conducts business in California as Equitable Network Insurance Agency of California, LLC). Financial Professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified. Any compensation that Ms. Jones may receive for the publication of this article is earned separate from, and entirely outside of her capacities with, Equitable Advisors, LLC and Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC). AGE-7876405.1 (4/25)(exp. 4/29)