Will The Fee Only Financial Planner Model Ever Catch On?
There is little doubt in my mind that hiring a Fee Only Financial Planner is in the best interest of the consumer. Financial Planning is an occupation and every Financial Planner needs to get paid. This is true for good planners, bad planners, honest planners and dishonest planners. If they do not get paid they can not earn a living. The Financial Planners loyalties are going to lie with the person or company who pays them, because without a paycheque they have no job.
If they get paid a salary they are working for the company that pays that salary, the advice they give is going to involve the products and services of the company they work for. If the planner gets paid on commission they are going to do their best to sell the products of the companies who pay them that commission. After all if they do not sell you something they do not get paid anything. If the Financial Planner is getting paid by you, then their loyalty is with you and providing you the advice they feel is in your best interest. It is pretty clear that having a Financial Planner who is only working for you is better for you then having a Financial Planner who is being paid by a company to sell you something.
Despite this, very few people actually use a Fee Only Financial Planner and I do not see that changing anytime in the near future. There has been so much advertising out there for so long misinforming investors that financial advice is “free” that it is very difficult for people to pay for it. Mutual Fund fees are hidden from investors, and commercials advertise free financial reviews or free second opinions. What these companies are really offering is a free sales pitch. You bring in your investment statements and they tell you how much better off you would be, owning the investments they have to sell. It is like getting a free automotive review from a car dealership when you are buying a used car. They are going to recommend a car on their lot and they are going to tell you all of the positive features about the car. But do you expect them to tell you if there is a mechanical issue or other negative aspect of the car?
To get unbiased advice you need to get it from someone who has no interest in selling you something and that is what Fee Only Financial Planners provide. It would be like taking a used car to a mechanic before you buy it. Because you are paying the mechanic and they do not benefit either way if you buy that particular car or not, they are going to give you an unbiased opinion on if that car is in good running condition.
The investment industry likes things the way they are now, many companies and many financial advisors/planners are making a lot of money with the current system so why would they want it to change. I can tell you from experience that it is a much more difficult task to be a Fee Only Financial Planner and that on average Fee Only Planners do not make nearly as much income as their commission based counterparts. The only way things will change is if either consumers demand a change, by moving there assets away from these companies, or if the government steps in and changes the laws that are currently in place. The UK and Australia have both announced plans to make commission based investment sales illegal to protect consumers, but Canada does not seem to be moving in that direction any time soon.