Why High-Net-Worth Individuals Need a Fee-Only Fiduciary Financial Advisor

Navigating financial markets can be as challenging as sailing uncharted waters. For high-net-worth individuals, these waters can often be laden with an even greater array of complex financial decisions, strategies, and outcomes. What is a realistic solution? 

Hire an experienced guide. But not just any guide. Hire a fee-only financial advisor who, as a fiduciary, must put your financial interests first. In this blog, I’ll explain why highly successful individuals like yourself should consider working with a fee-only, fiduciary financial advisor. We’ll explore:

1. How Fee-Only Financial Advisors Differ From Fee-Based Advisors
2. Understanding Financial Advisor Commissions 
3. How Fee-Only Advisors Can Help Guide You on Social Security 
4. The Importance of Working With A Fee-Only and AIF® 

Concerned about a potential recession and how that might affect your retirement plans?  Read our latest Quick Guide: Preparing Your Retirement Savings for a Recession.

How Fee-Only Financial Advisors Differ from Fee-Based Advisors

Fee-only and fee-based advisors provide clients with various financial planning and wealth management services. However, their compensation structures differ significantly, affecting their relationships with clients.

For example, as a fee-only financial advisor in Woodbridge, CT, I operate solely on fees I receive from my clients. This compensation structure mitigates potential conflicts of interest because I am not earning a commission from selling financial products or recommending particular investments. This aligns my interests directly with my clients, ensuring I give advice based purely on their financial goals, risk tolerances, and current circumstances.

On the other hand, fee-based advisors earn income through fees from their clients and commissions from financial product sales. While these advisors can still provide valuable services, their dual compensation structure can create potential conflicts of interest. Just think about the advisor selling the variable annuity and receiving a 10% upfront commission from one insurance company versus 7% from another. More on this below. 

A fiduciary financial advisor in Woodbridge, CT, can be the way to go if you seek an advisor who will always act in your best interest. As fiduciaries, we are ethically bound to always act in the best interest of our clients above our own. FYI, fiduciary is the highest ethical standard in the financial service industry. 

This fiduciary duty becomes increasingly important when retirement plans are produced for high-net-worth individuals and their families. Bad financial advice can have a major impact on their future financial security. 

Understanding Financial Advisor Commission Structures

In a commission-based model, financial advisors are paid a commission for each product or service they sell. This is often a percentage of the total amount of the transaction. For example, if an advisor sells a mutual fund or annuity to a client, they might receive a certain percentage of the value of the client’s investment as a commission. Clients do not pay direct commissions. It is deducted from their assets or advanced by the product company.

Here is an example:

1. Initial commissions: When a financial advisor sells an investment product like a mutual fund, annuity, or another insurance product, they could earn an upfront commission. This is typically a percentage of the client’s investment. For instance, if an advisor sells a mutual fund with a 5% commission on a $100,000 investment, the advisor would earn $5,000 for the sale. This money typically comes from the mutual fund company, not the client- potential conflict number one. 
2. Trailing commissions (also known as 12b-1 fees in the case of mutual funds): Some investment products pay ongoing commissions to the advisors for as long as the client remains invested in the product. These are often a smaller percentage of the client’s investment but can add up over time. Trailing commissions are typically paid out of the fund’s assets, which means they can reduce the fund’s overall returns. This is a form of indirect payment from the client’s investment.
3. Commissions from trading: If an advisor buys or sells stocks or other securities on behalf of a client, they may earn a commission on each trade. This commission is typically a fixed fee per trade or a percentage of the trade value.
4. Other commissions: Financial advisors may also earn commissions from selling other financial products, such as insurance policies or annuities. The insurance company or other provider typically pays the commissions for these products, but they can influence the cost of the product for the client.

It’s important to note that while you may not pay these commissions directly, they impact your investments. Commissions can reduce the overall returns of an investment product and may create potential conflicts of interest for the advisor, who may be incentivized to recommend products or trades that generate the highest commissions. It’s reasonable to assume the weaker the product, the higher the commission to sell the product. This is why the fiduciary standard, which requires advisors to act in the best interest of their clients, is so important, especially if you have accumulated substantial wealth. 

How a Fee-Only Advisor Can Help Guide You on Social Security 

Taking Social Security after 65 can increase your lifetime benefits. Delaying claims until 70 can boost your monthly benefit by up to 32% compared to claiming at 65, thanks to Delayed Retirement Credits. This strategy is particularly beneficial if you have good health, expect a long lifespan, or don’t urgently need income. Waiting also provides higher benefits to surviving spouses, aiding their financial security. 

However, everyone’s situation is unique; it’s crucial to evaluate your financial and health circumstances carefully before deciding when to claim Social Security.

The Importance of Working With A Fee-Only AIF®

Engaging a fee-only advisor with the Accredited Investment Fiduciary ® (AIF®) designation can prove immensely beneficial in navigating the financial complexities when you have accumulated significant wealth. The credentials should help reassure you that you are selecting the right financial advisor for the right reason.

As a fee-only advisor in Woodbridge, CT, with the AIF® designation, I’m paid directly by my clients for advice, plan implementation, and ongoing holistic wealth management services. This structure aligns my interests with yours because my compensation does not depend on selling investment products or transactions.

Regarding retirement planning, the expertise of an AIF® can be particularly valuable. AIF® designees have specialized knowledge of financial fiduciary standards of care and are trained to implement prudent investment processes into their practice. These advanced skill sets help create customized retirement plans to create the assets you need to last a lifetime. 

Moreover, AIF® designees are equipped to handle diverse investment strategies and retirement planning issues that high-net-worth individuals often face late in life. This includes a comprehensive approach that can include estate planning, tax strategies, and philanthropic endeavors, integrating all aspects of your financial life into one cohesive strategy. 

By partnering with a fiduciary financial advisor with the AIF® designation in Woodbridge, CT, you can have greater confidence in your retirement planning strategies and have a clearer path toward pursuing your financial goals.

Interested in learning more about our fee-only wealth management services? Connect with our team today.