When shopping for a financial advisor, you will come across a variety of compensation plans, including fee-only and fee-based advisors. Fee-only advisors and fee-based advisors are very similar, but they have some big differences, and this can have a big impact on the type of advice you receive as a client.
Here’s what you need to know about fee-only and fee-based financial planners.
What is a fee-only financial planner?
A fee-only financial planner is someone who receives compensation from their clients for their services and does not receive commissions on the sale of financial products as additional compensation. The fee can be paid as an hourly rate, a fixed amount or as a percentage of assets under management (usually around one percent).
Fee-only advisors typically act as fiduciaries to their clients, meaning they put their clients’ interests ahead of their own or their firms’ interests. Certain professional designations, such as certified financial planner (CFP) and chartered financial analyst (CFA), meet the fiduciary standard.
Be sure to check an advisor’s credentials before hiring them and understand how he or she is paid, as this may affect the advice you receive. It’s one of the best questions to ask a financial advisor.
What is a fee-based financial planner?
Fee-based financial planners receive compensation from their clients for their services, but may also receive additional compensation related to the sale of certain financial products, such as mutual funds or annuities.
Unlike fee-only advisors, fee-based financial planners are typically not fiduciaries and are instead only required to recommend investments to clients that are suitable. Because the fee-based advisor may be financially incentivized to place clients in products from which they benefit, a conflict of interest arises. As a client, you may end up in investments that are suitable based on your objectives and risk profile, but are not necessarily the best for you.
Fee-only financial planners versus fee-based financial planners
The key difference between fee-only advisors and fee-only advisors is that fee-only advisors do not receive any additional compensation beyond what their clients receive, while fee-only advisors can also earn commissions on sales of certain products. That distinction may seem small, but the right reward incentives align the interests of the advisor with those of the client.
In most cases, a fee-only advisor will be the best choice because they are incentivized to act as a fiduciary to their clients, and you typically don’t have to worry about potential conflicts of interest when they make recommendations. .
However, some people prefer to work with a single financial planner rather than, for example, buying insurance from one person and getting investment advice from someone else. In this case, a fee-based advisor may make sense, but make sure you understand exactly how it is compensated. You want to make sure you’re doing things that are in your best interest, not just lining the advisor’s pockets with sales commissions.
In short
Fee-only financial planners and fee-based financial planners are two of the most common fee arrangements in the financial advisory industry. Fee-only advisors make money only from the fees their clients pay, while fee-only advisors can also earn fees from the sale of financial products. Fee-only advisors are the best choice for most people when it comes to choosing an advisor.
Consider using Bankrate’s financial advisor matching tool to identify potential advisors in your area.
