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When looking for a financial advisor, you’ll encounter various compensation arrangements, including fee-only advisors and fee-based advisors. Fee-only advisors and fee-based advisors sound very similar, but they have some major differences, and it could have a big impact on the kind of advice you receive as a client.
Here’s what you should know about fee-only and fee-based financial planners.
What is a fee-only financial planner?
A fee-only financial planner is someone who earns a fee for their services from their clients and does not receive commissions on the sale of financial products as additional compensation. The fee may be paid as an hourly rate, a flat fee or as a percentage of assets under management (typically around one percent).
Fee-only advisors typically act as fiduciaries for their clients, meaning they put their clients’ interests before their own or their firms’. Certain professional designations such as a certified financial planner (CFP) and a chartered financial analyst (CFA) are held to the fiduciary standard.
Be sure to check an advisor’s credentials before hiring them and understand how they’re being paid because it can 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 are paid a fee for their services by their clients, but may also receive additional compensation tied to the sale of certain financial products, such as mutual funds or annuities.
Unlike fee-only advisors, fee-based financial planners are not typically fiduciaries and are instead only required to recommend investments to clients that are suitable. Because the fee-based advisor may be incentivized financially to place clients in products they profit from, it creates a conflict of interest. As a client, you may end up in investments that are suitable based on your goals and risk profile, but not necessarily the best for you.
Fee-only financial planners vs. fee-based
The main difference between fee-only advisors and fee-based advisors is that fee-only advisors earn no additional compensation beyond the fee that is paid to them by clients, whereas fee-based advisors may also earn commissions on the sale of certain products. That distinction may seem small, but the right compensation incentives align the advisor’s interest with the client’s.
In most cases, a fee-only advisor is going to be the best choice because they’re incentivized to act as a fiduciary for their clients, and typically you won’t have to worry about potential conflicts of interest when they’re making recommendations.
However, some people may prefer to work with a single financial planner rather than buying insurance from one person and getting investment advice from someone else, for example. In this case, a fee-based advisor may make sense, but make sure you understand exactly how they’re being compensated. You’ll want to make sure that you’re doing things that are in your best interest, not just lining the wallet of the advisor with sales commissions.
Bottom line
Fee-only and fee-based financial planners are two of the most common fee arrangements in the financial advising industry. Fee-only advisors earn money only from the fees paid to them by clients, while fee-based advisors may 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 help identify potential advisors in your area.
FAQs
Fee-Based Financial Advisors: Which Is Right for You? All things equal, a fee-only advisor is often the right choice for investors. With a fee-only financial advisor, you're more likely to get unbiased and objective investment advice.
Is Edward Jones fee-only or fee-based? ›
Edward Jones charges an annualized fee, based on the value of assets held in the client's account.
What to expect from a fee-based financial advisor? ›
A fee-based advisor collects a pre-stated fee for their services, which can include a flat retainer or an hourly rate for investment advice. A fee-based advisor actively managing a portfolio would likely charge a percentage of the assets under management.
What is a fee-based financial service? ›
A fee-based service is usually offered by a financial advisor who charges an annual percentage of the client's assets as a flat fee for all or most professional services. The average fee is 1% to 3% of the assets.
What is the major advantage of using a fee-only financial planner? ›
Many financial advisors offer a fee-only compensation structure, where they receive a fee for their planning services in lieu of traditional commissions. The benefits of fee-only include transparency, no hidden charges, and no conflicts of interest in selling a certain product line or company offering.
Is a fee-only advisor a fiduciary? ›
Fee-only advisors typically act as fiduciaries for their clients, meaning they put their clients' interests before their own or their firms'. Certain professional designations such as a certified financial planner (CFP) and a chartered financial analyst (CFA) are held to the fiduciary standard.
What is the downside of using a fiduciary? ›
A disadvantage of a fiduciary is that fiduciary advisors are often more expensive than non-fiduciary advisors as they charge higher market rates.
Is it worth paying financial advisor fees? ›
A financial advisor is worth paying for if they provide help you need, whether because you don't have the time or financial acumen or you simply don't want to deal with your finances. An advisor may be especially valuable if you have complicated finances that would benefit from professional help.
What are the disadvantages of having a financial advisor? ›
Potential negatives of working with a Financial Advisor include costs/fees, quality, and potential abandonment. This can easily be a positive as much as it can be a negative. The key is to make sure you get what your pay for. The saying, “price is an issue in the absence of value” is accurate.
Is Charles Schwab a fiduciary? ›
Working with a corporate trustee like Charles Schwab Trust Company can give you: Objectivity. As a fiduciary, we will administer your trust in a professional and impartial manner.
6) Money: In fund based financial service, money in the form of cash is involved in the transaction. In fee based financial service, no money is directly involved in the transaction.
How do fee-based accounts work? ›
Fee-based account basics
In fee-based investment accounts, advisors and the investment or mutual fund dealers they work for will typically charge an account fee for advice, access and service directly to the investor. This fee is usually disclosed and arranged up front, and is often based on the assets in your account.
What is the meaning of fee based? ›
used to describe a person that you pay a fixed price for advice, a service, etc.: Although many advisers are switching to a fee-based service, the majority still survive on a commission basis. (Definition of fee-based from the Cambridge Business English Dictionary © Cambridge University Press)
What is a fee-based account? ›
Fee-based account basics
In fee-based investment accounts, advisors and the investment or mutual fund dealers they work for will typically charge an account fee for advice, access and service directly to the investor. This fee is usually disclosed and arranged up front, and is often based on the assets in your account.
What is fee based pricing? ›
refers to a retail investment pricing structure in which fees are charged as a percentage of the market value of assets, as opposed to a commission per transaction.
