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Fee-Only vs. Fee-Based Financial Planner: What’s the Difference?

Fee-only means you pay the advisor directly for advice; fee-based planners may also earn commissions on products they sell you. Ask before you hire anyone: How do you make money?
Aug. 29, 2018
Financial Planning, Investing
Fee-Only Versus Fee-Based Financial Planner: What's the Difference?
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A “fee-only” financial advisor sounds strikingly similar to a “fee-based” financial advisor, but there’s a big difference in how they get paid.

There’s an important distinction between hiring one type of advisor versus the other. Here’s what you should know about each:

Fee-Only Planners
Fee-Based Planners
  • Paid directly by clients for their services and can’t receive other sources of compensation, such as payments from fund providers
  • Act as a fiduciary, meaning they are obligated to put their clients’ interests first
  • Paid by clients but also via other sources, such as commissions from financial products that clients purchase
  • Brokers and dealers (or registered representatives) are simply required to sell products that are "suitable" for their clients

What is a fee-only financial planner?

Fee-only financial advisors are paid directly by clients for their services, be it a flat fee, hourly rate or a percentage of assets under management, typically around 1% of a client’s portfolio’s value each year.

» Read more: How to find a financial advisor who’s right for you

“A fee-only planner can only be paid by clients; they can’t receive any other source of compensation” such as payments from providers of funds their clients use, says Celia Brugge, a fee-only advisor with Dogwood Financial Planning in Memphis, Tennessee.

Fee-only financial advisors act as a “fiduciary,” a term you may hear thrown around; it means they are obligated to put their clients’ interests first. Ask if your financial planner is a registered investment advisor or a certified financial planner — both types are fiduciaries — and this is an important consideration when choosing an advisor.

What is a fee-based financial planner?

A fee-based financial advisor gets paid by the client but also via other sources, such as commissions from financial products that clients purchase. “A fee-based planner is a term that gets used kind of loosely,” Brugge says.

» Learn more: Compare fee structures, from low-cost robo-advisors to specialized human advisors

“The way to think about it: A fee-based advisor can charge [a] client for investing advice but also get payments from a third party,” like a commission from a fund provider for steering clients to buy shares in the fund, Brugge says. That can set up a conflict of interest, as the advisor charges you for advice while steering you toward investment products from which the advisor profits. “There are a lot of advisors who wear two hats, and they can charge you for both,” she says.

Ask if your financial planner is a broker or a dealer, also known as a registered representative. These planners are generally held to a lower legal standard, which simply requires them to sell products that are “suitable” for their clients.

Which type of financial planner is best for me?

Financial planners are paid in a variety of ways, but understanding if your advisor is getting payments for steering you toward certain mutual funds or other financial products is important — and raises questions about conflicts of interest. A “suitable” investment for you may not necessarily be the most cost-effective option. (And if cost is your utmost concern, the automated services of a robo-advisor may be a better fit.)

If you want a fee-only financial advisor, look to a professional group that requires its members to abide by the fiduciary standard. Those include: The National Association of Personal Financial Advisors, Garrett Planning Network, XY Planning Network and the Alliance of Comprehensive Planners. Following this standard is one of five traits the best financial planners share.

If your advisor is fee-based, search for the brokerage’s Form ADV filing with the U.S. Securities & Exchange Commission. The document includes information that spells out how brokers at the company are compensated. (It’s a good practice to check Form ADV before you hire any financial advisor, human or robo. In addition to explaining fee structure, it lists past misconduct if there is any.)

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