Fee-Only vs Commission Financial Advisors: The Truth

***The following is a transcription of this podcast episode. Listen Here.

Why I'm a Fee-Only Financial Advisor (And Why It Matters for Your Money)

Today we are breaking down what it means to work with a fee-only financial advisor or fee-only financial planner. P.S. I'm one of those, but backstory really quick.

The last few weeks I've had stuff come across my desk. You guys are my clients and you've brought me things that you've heard on the radio. You've told me stories of things you've heard at the gym or on the golf course and I've heard the narratives that have been piped into your head by other people and it's making me kind of pause and wanting to remember why we do what we do.

My Journey Through the Traditional Financial World

So without really throwing my esteemed colleagues under the bus, I really want to take this moment to help you understand why this woman, this Leanne that you hired, does what she does and it really stems from being in the traditional financial advisory places that I've worked—from large insurance companies to small local firms to large financial firms. I've done it all over my career.

And over my career I have seen firsthand the conflicts of interest that were present in those places and really the rock and hard place that I was put into with both my clients and my employers. And the only reason you should care about that is because when you're talking to a financial advisor or you're talking to a financial planner and you ask them "what should I do with my money," you don't want there to be any answer coming your way that isn't in your best interest.

The Problem with the Traditional System

Financial planners by nature need to be fiduciaries—in other words, doing only what's in the best interest of their clients. And what I know that I know is that most financial advisors like the people that I know in my profession are good-hearted people. They're not evil people, but by and large they are people employed by a financial system that is all about making money, gathering assets and keeping assets under management.

So they're stuck in a bad business model and it taints what they're allowed to do. And there's a threat to the person working there that if they don't hit these certain quotas of selling so many mutual funds or how many dollars of assets under management they brought in over the course of a year or how many insurance products that they sold, if they don't hit those marks their family no longer has health insurance.

It's literally that stark for the people that are providing advice.

The Education vs. Reality Problem

So we go to school and we get licensed and we do all this advanced education work to be the best advisors we can be and then without even knowing it we blindly get hired by firms that don't necessarily have your best interest at heart.

Think of it this way: if I told you that your financial advisor gets paid more when they sell you a certain product, would that change how you view their recommendation? Of course it would, right?

What Fee-Only Actually Means

Fee-only advisors or fee-only financial planners are people who decide that they are only going to be compensated directly by their clients. When I made this change for myself and decided I would never work for another firm again, I decided I'd be fee-only.

So it means that I am never compensated by a product company like a mutual fund, brokers, or third parties. Think of it kind of like hiring an attorney or a CPA. Those people are people you pay for advice. You're paying them for advice, not because they sold you something.

The Commission Problem

When you compare this to commission-based advisors who get paid when they sell you specific products, there's a vast difference there and the difference isn't just philosophical. It fundamentally changes the advice that you receive because advisors are human and they're in a bad business model.

So if they're selling you mutual funds, they often receive upfront commissions of 3% to 5%. So that means if you had $100,000 to invest with somebody who's earning commissions, and by the way they won't necessarily tell you that they're getting commissions, they might earn $3,000 to $5,000 immediately off the top of your money.

So ask yourself: is that advice you want to take?

The Car Dealership Analogy

I kind of equate it to this. If you walk onto the parking lot of any car dealership and you ask the salesperson that walks out to meet you, "Hey, do I need a new car?" What are they going to say? Of course they're going to say yes you need a new car because they don't eat. They don't pay their rent or their mortgage if they don't sell you a car.

So their advice isn't in your best interest. It's just sales advice.

The Assets Under Management Obsession

It gets worse. Most firms are absolutely obsessed with something called the assets under management model because that's how they get paid. So the advisors are basically just asset gatherers. Their job is to bring money in and to make sure it never leaves the firm.

So what that does is creates a very narrow focus that actually doesn't serve your complete financial picture.

Real-World Conflicts of Interest

When you think about this and you're thinking about what kind of advice you need, like in my career I've watched people come in and need to talk about a realistic household budget, and I've also had people come in and want to talk about charitable giving strategies or estate planning, things like that.

Or what about this? When people come in and want to talk to me about taking a lot of money and paying their mortgage off early. If an advisor is in that assets under management model where they lose their job or get paid less, if you say "yeah you should go ahead and pay your house off, let me ship you that money," there's a conflict of interest.

Why This Matters for Our Relationship

So it's important that we understand between us and our relationship that when I give you advice that you should or shouldn't do something, it is not because I'm being compensated to give you that advice. You pay me for the advice that I give you through the fees that I charge you and that's the way that allows me to practice in a way that you are not in a situation where there's a conflict of interest between us.

When you pair that with my fiduciary standard as a financial planner and the fact that I'm a fee-only planner, when I give you advice it is not because I'm getting a commission or a kickback and it couldn't be more important.

The Bottom Line

And so as you see your kids and you see your grandkids or your friends talking about their advisor at Edward Jones or Merrill Lynch or wherever, just know that that may sound cool and sophisticated but there is a cost.

And I'm so thankful for the opportunity to work with each of you and that none of you have to pay that price.

The difference between fee-only and commission-based advice isn't just about money—it's about trust. When you know your advisor only gets paid by you, not by the products they sell, you can trust that their recommendations are truly in your best interest. That's the foundation everything else is built on.