"Fee-Only Advisor" is just a marketing term

WRITTEN BY: Gideon Drucker, CFP® AIF® ECA

Before I dive into “why” I think the “fee-only” moniker that so many advisors tout is nothing but fancy marketing jargon & has NO bearing on whether an advisor does right by their clients, let me share some light on my fee structure so you know where I’m coming from. 

1. Every single client that my firm takes on starts by completing a Financial Life Plan for a FLAT fee. As part of this process, they receive a cash flow assessment, investment review, insurance audit, estate planning guidance, scenario planning, a measurable action plan (MAP), tax optimization strategy, lifestyle observations, and 6-7 meetings of engagement. 

At the end of this plan, they can CHOOSE to implement our recommendations on their own, with another advisor, or with us. I’ll repeat that: Clients are free to take all of our ideas & reflections and implement them as they best see fit. Some clients have done just that. 

While we don’t tout it, in practice, we are “fee-only” flat-fee advisors for any client that wants this sort of relationship & set up. 

2. Last year, 2022, over 80-85% of my Wealth Builder Division's revenue came directly from client fees. This number will only go up over time as my client’s assets (AUM), financial planning fees, & net worth grows. 

I’m starting with these 2 facts not because I think they offer any insight into the morality of my business but so that when I explain why I roll my eyes at advisors that advertise about being “fee-only”, you realize that it would be very easy for me to join the chorus as well….touting the fee-only lifestyle to generate new business. 

Let’s start here. 

When an advisor says they are “fee-only” they mean that they receive no commissions from insurance companies for selling risk management vehicles such as life insurance, disability insurance, long term care, or annuities. (All of these types of insurance work similarly to how a travel agent gets paid: the advisor gets paid by whichever insurance company that they’re placing business through via commission rather than from the client directly via advisory fees.) 

(They could also mean that they don’t receive commission from selling “A shares” of mutual funds but, honestly, nobody does that anymore, fee-only or not, so that doesn’t really matter…I just wanted to note it for completeness)

In order to make sure they are not “receiving any commission” from placing insurance for their clients, these advisors are not directly involved in getting any of their clients’ insurance coverages Inforce. Instead, they may refer you to an outside brokerage insurance firm to handle this aspect of your planning. 

Insurance planning is important. Advisors need to spend time educating their clients around the importance of risk management, the different types of coverages available, how to balance their protection needs with the various costs of each & making sure that there are no gaps in their financial foundation. Oftentimes, these involve difficult conversations around mortality, risk of loss, family dynamics, and at least ensuring a client understands what “worst case” scenario for their family might look like. 

I am absolutely not comfortable passing this responsibility off to a third party that is not part of MY organization simply so that I can claim to be “fee-only.” 

And by the way- How deep is one of these “outside” insurance brokerage firm that operates on volume & doesn’t really know you or your family situation going to get? Are they going to be comfortable being “brutally honest” about what you need and why? Are they going to push back when it’s clear you’re making a mistake? 

And more to the broader point, why is it “better” to have an advisor that is so committed to their “fee-only” title that you have to be handed off to someone outside of their team to get important work done? 

I further don’t understand how an advisor can be truly “holistic” or “comprehensive” if they’re not involving themselves DEEPLY INTO insurance & estate planning. 

Because it’s only logical that a “fee-only” advisor that doesn’t involve themselves in the insurance world wouldn’t be as educated/knowledgeable in risk-management solutions (life insurance, annuities, long term care) and the place it can hold in a family’s holistic plan if they literally aren’t able to make money from recommending or handling it. 

They are incentivized to not know it. (And honestly…this is best case scenario…I’ve heard way too many unsettling stories of investment advisors not even touching on insurance planning or merely telling a client to reach out to an insurance company to get a “quote” and calling it a day.) 

I work with a lot of high-income earning young families in their 30’s and 40’s. Most of them are substantially underinsured. They need inexpensive term life insurance while their kids are young, and they need disability insurance because typically the coverage they get through work would leave them with only a fraction of the income they need to live. 

A smaller percentage of them are saving hundreds of thousands of dollars a year and want/need permanent insurance to lower their future estate tax liability, provide them with a non-correlated asset to the market, or because they like the idea of being able to turn $1 today into $4 paid tax-free to their family when they die. Once we run them through the numbers & provide different options, most of these clients want us to go out and get them this coverage with whichever insurance company makes the most sense. 

Well, of course they do! Why would they want us to hand them off to an outside brokerage firm or force them to go to an insurance salesperson that may not have their best interests in mind? And the only way that we can go out and get them this coverage is to serve as the “insurance agent” on the case…which, definitionally, involves receiving a commission. 

I genuinely don’t understand why this would be construed as a bad thing. They need the coverage, we go out and get it for them, we make it quick & easy for the client while making sure it gets handled properly and accurately by whichever insurance company is the best fit, and then we get paid for our work in placing the coverage Inforce. 

You either trust your financial advisor to have your best interest at heart or you don’t…. because conflicts of interest can always exist. 

For example, let’s take a fee-only advisor that gets paid only via an assets under management fee (AUM)…wouldn’t they be incentivized for you to invest more money with them so they receive a larger fee? And wouldn’t any dollars allocated to insurance & risk management solutions mean less dollars for them to charge AUM fees? (Again, we are proud to charge AUM fees…my only point is only that conflicts of exist can exist anywhere and being a fiduciary in practice is about doing the right thing regardless of your structure.)

Another one: If a “fee-only” advisor has a firm they recommend on the insurance side for their clients…aren’t they probably receiving investment client referrals from that firm as well? Don’t they probably look better the more clients they pass to this insurance firm?

Quite frankly, the implication that I can only act as my client’s trusted fiduciary advisor if I get paid in one particular way & that fee-only advisors don’t have a bias is as naïve as it is insulting.

Now before I move too far beyond the pack, I do understand why “fee-only” became a buzzword. There are A LOT OF bad insurance agents out there that utilize some pretty horrific sales tactics that make a lot of people (understandably) so turned off by the entire insurance world that they don’t want anything to do with it. 

There are also plenty of insurance agents calling themselves financial advisors even though every single client that they work with somehow needs the exact same insurance product that they just happen to sell. I would RUN when you come across someone like this.

So, I understand that “fee-only” can eliminate these sorts of charlatans from the mix. But once you’ve done that….” fee only” is just a marketing slogan & I’d rather take care of my clients than advertise a catch phrase. 

I am available to speak over a 15 minute Right Fit call if you feel you could use some help navigating your financial situation.

Together, we can determine if our Financial Life Plan® process is the right fit for you.