Your business is growing, and you’re earning enough money to set aside and begin to build some wealth.

Sticking it in your mattress is just an old cliché, banks don’t pay much interest, and while the broker down the street may help point you to a great stock pick, that’s still just a piecemeal approach to managing your money for the long term.

So when it comes to gaining the big picture perspective, where do you turn for advice? If you’re hiring a professional to help you protect and grow your personal wealth, you have a couple of basic choices.

Many people simply turn for investment advice to that same (successful, we hope) broker, buying or selling stocks or other securities based on that person’s recommendations. The broker might even offer a big picture approach, helping choose investments that are more secure so as you age the downside risk to your nest egg declines as retirement nears.

There’s no doubt that many such professionals try to do their best to make fair and thoughtful decisions for their clients. And since they’re paid largely on commission with each trade or within mutual fund charges, it’s easy to feel like their service is practically free. It’s not, of course. Commissions themselves amount to something, however small. But there are bigger reasons to consider an alternative approach: the fee-only financial planner.

 

Paid for Time, Not Trades

The term means just what it says. Fee-only planners get paid not for buying or selling investments on your behalf, but for reviewing your financial assets and goals and making recommendations accordingly. Those recommendations are based on their knowledge of the investment markets and their understanding of your particular circumstances.

Yet how they’re paid just scratches the surface when it comes to really understanding the difference, says Michael Haubrich, financial advisor based in southeastern Wisconsin and member of the National Association of Personal Financial Advisors (NAPFA.org).

“The bigger distinction is not the compensation, but ... is the person you’re dealing with acting as a fiduciary,” Haubrich points out. To put it in plain English – is the professional required under the law to act in the client’s best interest?

The traditional stockbroker is governed by the federal Securities Exchange Act passed in 1934. That law requires the broker to fully inform clients about the “suitability” of an investment, including pointing out the risk that any particular investment might wind up becoming worthless.

A separate law passed in 1940 sets a higher standard for registered investment advisors, a group that includes fee-only planners; they are obliged to tailor their advice to the client’s best interest. Simply disclosing risk and advising investors to consider the suitability of a particular investment isn’t enough.  

“We do a deep dive into what the client’s objectives are and what their risk tolerance is,” explains Haubrich, whose business is Financial Service Group Inc. “We can be held liable if we can’t demonstrate that the advice we give is in the best interest of the client.”

Based on information collected from the client, a fee-only planner might recommend a particular stock, but she or he won’t get paid differently based on whether the client decides to follow through on the recommendation. As a consequence, the planner has no incentive to push any particular investment.

 

Methods of Payment

Of course, the planner gets paid in some way – and typically up front, so their services cost more at the outset. Some planner fees are structured on the basis of hourly charges or through a system of retainers that cover a certain amount of service before they must be renewed – just as business lawyers typically are.

Most planners, though, set their fees on the basis of a percentage tied to the total value of the assets managed for the client. A 2013 survey by the trade publication Investment News found that fees go down as the assets under management go up; for $100,000 to $500,000 in assets, expect to pay about 1.5 percent per year; people with $5 million under management paid on average less than 1 percent per year.

That brings up another wrinkle in the ever-evolving investment advisor world, Haubrich notes.

Many brokerage houses, recognizing the concerns people may have about the objectivity of advice coming directly from a securities dealer, are establishing separate arms staffed by advisors paid ostensibly solely on the basis of a percentage charged against the assets they’re managing, like fee-only planners.

He points out, however, that those advisors often get some form of additional commission relating to investments that are conducted through their employers, distinguishing them from the true fee-only planner. “From the consumer’s point of view, they all look the same,” Haubrich observes. “They all wear suits, they all wear ties.” But when it comes to the way they’re actually paid – and the incentives that might influence their advice – “that is not a subtle difference.” Wall Street, he notes, has been lobbying heavily to derail proposed federal Labor Department regulations affecting businesses marketing investment platforms for company 401(k) defined contribution pension plans. The feds are arguing those firms should be held to the fiduciary standard – serving participants according to their best interests – rather than the less strict disclosure and suitability standard; the industry behind those plans, of course, would prefer a less strict standard.

 

The Bigger Picture

Finally, fee-only planners do a lot more than simply tell you what stocks or bonds to buy or sell.

Indeed, as more and more average people are getting comfortable with discount, do-it-yourself brokerage services, and as even more complex financial advice is starting to become automated in the form of online calculators that help people begin to understand the big picture of their own financial condition, some fee-only planners are offering a more comprehensive approach.

Haubrich, for example, views himself these days as helping clients with “life transitions.”

“We’re financial life planners,” he says. “We really focus on the client’s life, where they want to go and what they want to do in their life. Then we align their resources, not only their financial resources but their career assets, to make sure there’s good alignment to help them get through whatever life transitions they’re in now.”

That can include not just giving advice about investments but connecting clients with other sources of guidance such as work and career counselors and other kinds of advisors.

Such broadly based advice may be a lot more than you’re looking for, of course.

Still, if you’re in the fortunate position to have assets in need of management, it behooves you to think carefully about what sort of advice you want, and how you want to pay for it.