The Big Difference Between a Fee-Only & Fee-Based Financial Advisor

How is your financial advisor compensated? This should be at the top of your considerations when selecting a financial professional.

As you might imagine, there are different compensation models for financial advisors and how a financial advisor gets paid tells you a lot about the type of service you can expect. Understanding the difference between fee-only and fee-based compensation models is something every investor should care about because this small distinction immediately tells you a about an advisor’s conflicts of interest.

Here’s more on what makes fee-only financial advisors different from fee-based financial advisors.

Fee-Only Financial Advisors

They are legitimately fee-only. Just like it sounds in the language, fee-only financial advisors are paid from the fees they charge. Importantly, they are only compensated by fees from the client. Typically, fee-only financial advisors charge either an hourly rate, a percentage on the assets they manage, a flat fixed fee, or some combination. Some fee-only financial advisors charge a flat fee for financial planning and then a percentage fee for the assets they manage as an example. The bottom line: fee-only financial advisors don’t, and will never, try to sell you financial products.

They have limited conflicts of interest. No one is conflict free. An advisor who charges a percentage fee based on the assets he or she manages will still be incentivized to gather as much of his or her clients’ assets as possible. However, fee-only financial advisors are registered investment advisors (RIA) who are held to the highest fiduciary standard, meaning they must do what is best for their client. Because fee-only financial advisors do not sell financial products, they are not motivated to recommend a financial product to you based upon a potential kickback.

They can offer a wider array of services. Fee-only financial advisors can generally choose from a wide pool of investment options and recommend the one that is best for an investor’s specific situation. Without their income being tied to financial products, fee-only financial advisors can (and often do) offer comprehensive financial planning services to serve their clients needs. From retirement planning, education planning, tax strategy, and estate planning services, fee-only financial advisors usually have all areas that impact a person’s financial life represented in their service offerings.

Fee-Based Financial Advisors

They earn a commission. These professionals get paid when they sell certain financial products on top of the fees they charge. The fee-based model is a hybrid and can be confusing to investors who don’t understand the distinction. A good example of this fee-based compensation model is when a financial advisor offers comprehensive financial planning services and is also licensed to sell insurance products. They may only charge a fee on the financial planning and investment services, but they earn commission on the insurances they sell.

They aren’t held to the Fiduciary Standard. Simply put, fee-based financial advisors are not held to the highest standard required by law for financial advisors to serve their clients’ best interests at all times. This has become even more evident in light of the recently voided DOL Fiduciary Rule that doesn’t’ require fee-based financial advisors to adhere to the same fiduciary standard. The good news is that the Securities and Exchange Commission (SEC) is now working on their own version of the rule (see The SEC chairman said brokers would no longer be able to base advice on what makes them the most money.”) but I am not holding my breath. They may be honest professionals who believe they are doing right by their clients, and maybe their recommendations are suitable, but the line will always be blurred when commissions are involved due to the embedded conflict of interest under such an arrangement.

Conclusion

When it comes to your financial well-being, who would you most trust with your personal finances? The financial advisor who has limited conflicts of interests that stand between you and what’s best for you or the financial advisor who intentionally collects a fee from you and a commission for the products he or she recommends?

How shocking is it when you hear of doctors taking kickbacks from drug companies? If the thought of a doctor writing prescriptions for any reason other than what’s in their patients’ best interest disturbs you, then think about what it would be like if it was a generally accepted practice among the medical community. Yet, that is exactly what is happening within the financial services industry.  

Expect more from the financial advisor you select to worth with. You certainly deserve the highest standard of care, and you can find it be searching for a fee-only financial advisor.

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