Fee-Only or Fee-Based Financial Advisor? Know the Difference
by Nina Gass
The worst feeling in the world is not knowing if you’ve gotten what you’ve paid for or not. You go through the sales process, make a decision to purchase a service and hope you’ve made the right choice. It’s nerve-racking to think you’ve just entrusted another human being to make the best decision for you, and that’ll you’ll go with it.
Choosing a financial advisor is no different, but there’s at least one piece of crucial information to be aware of before committing to anything: consider how they get paid.
When seeking financial advice from a professional, there are generally two payment models. Depending on your background, needs and goals, and financial position, one financial advisor payment model might be better suited for you than the other.
Fee-only financial advisors only receive payment from the client. This payment could be a flat fee, a small percentage of managed assets, or an hourly rate. Fee-only advisors are fiduciaries, which means they’re legally obligated to act in the best interests of their clients. One way to identify these financial advisors is to ask how they get paid and whether they’re a fiduciary.
You can also check the fee-only directories available with organizations such as The National Association of Personal Financial Advisors, The Alliance of Comprehensive Planners, XY Planning Network, or the Garrett Planning Network.
Fee-based financial advisors receive commissions for any third-party financial products clients decide to buy through the firm. These commissions include trades, insurance policies, and mutual fund share sales. They may also receive payment directly from clients for services provided.
Since this model focuses on commission, these financial advisors serve as brokers who are selling available financial products that match their clients’ needs. While this doesn’t mean they are not concerned about the client, the commission-based compensation creates the potential for conflict of interest.
Additionally, some fee-based advisors may be less focused on increasing the size and worth of their clients’ portfolio than a fee-only financial advisor who gets a percentage of those assets.
These financial advisors may identify themselves as brokers, dealers, or registered representatives. The majority of large financial brokerages follow this model as do some robo-advisors.
Before hiring one of a fee-based advisors, search for their brokerage’s Form ADV on file with the U.S. Securities & Exchange Commission. This filing explains this company’s broker compensation and fee structure.
There is a lot to consider when comparing fee-only and fee-based financial advisors.
You may feel more confident that a fee-only financial advisor will offer more objective advice. However, advisors who get paid based on a percentage of assets managed may give less attention to clients with a smaller portfolio. At the same time, there is a mutual best interest because you will both benefit from moves that increase account value.
With a fee-based advisor, you must carefully examine all the potential fees involved. While they may not be solely focused on growing your account value, their comprehensive advice about numerous financial products could save time and money over the long term.
The Certified Financial Planner Board also has a financial advisors’ directory for advisors that hold a CFP certification. The directory listing should include information on how the advisor gets paid.
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