Financial advisors, and others in the financial service industry who provide investment advice, can be compensated in a variety of ways, which in turn can affect the nature and cost of the services clients receive. Generally, advisors embrace one of three compensation strategies, falling into one of three broad categories: fee-only advisors, commission-based advisors, and fee-based advisors.
Fee-only advisors are paid directly by their clients for the services they provide. Instead of earning commissions from the sale of financial products, the fee-only advisor earns their fee by providing financial planning advice (typically on an hourly or project basis), and/or by providing investment management services based on a percentage of assets under management (AUM) or advisement. Some fee-only advisors only provide financial planning advice, while others only provide asset management services. Still, others combine both services for a more holistic approach toward meeting the client's overall financial needs. Creveling & Creveling is one of these firms.
Many people believe that the fee-only model is the best approach to delivering financial advice. The fee-only approach ensures transparency of fees, which keeps fees low, eliminates many of the conflicts of interest inherent in the commission-based model, and encourages a holistic approach to meeting client needs rather than a short-term focus on product sales.
At Creveling & Creveling Private Wealth Advisory, we are fee-only advisors. We do not receive compensation from third parties or from the sale of products, which means there are no conflicts of interest regarding our advice. Because there are no commissions, complicated schemes, surrender fees, or lock-in periods, we're able to work solely in your best interest.
Commission-based advisors typically earn money for themselves and their firm when their clients purchase a financial product. The structure of the financial services industry is such that many firms are actually distribution platforms for a variety of financial products for which they receive a fee for distributing. "Advisors" working for these companies generally get paid when they are able to sell one of these products to one of the firm's clients. Despite an "advisor's" best intentions, differing commissions and firm production quotas create pressures to sell rather than to advise and to push higher-commission products rather than the most appropriate product. Additionally, there is little incentive to take the time and effort to undertake a holistic assessment of a client's overall situation and needs, and then provide the advice, decision-making support, and product recommendations that truly address the client's needs. If the advice required cannot be met with a product sale, it is not provided.
Not disclosing the commission or "distribution fee," which is deducted by the firm from the client's investment, can create the illusion in the client's mind that there is no cost and that any advice provided is free. In reality, the lack of transparency results in higher fees precisely because the client is either unaware of the fees involved or falls into the all-too-human trap of "out of sight, out of mind."
Fee-based advisors are a hybrid of the fee-only and commission-based planning models. They usually charge fees by the hour or based on AUM, but they also earn commissions on certain product sales such as insurance and annuities.