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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?
Financial Planning, Investing
Fee-Only Versus Fee-Based Financial Planner: What's the Difference?

This little question can make a big difference in choosing a financial advisor to help manage your cash: How do you make your money?

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.

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.

“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.

A fee-only planner can only be paid by clients; they can’t receive any other source of compensation.

Celia Brugge, Dogwood Financial Planning

Fee-only financial advisors are 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 those types of financial advisors are fiduciaries.

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.

“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.

There are a lot of advisors who wear two hats, and they can charge you for both.

Celia Brugge, Dogwood Financial Planning

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. Brokers, however, are required to uphold fiduciary standards in one area: retirement accounts, such as traditional or Roth individual retirement accounts.

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.

If you want a fee-only financial advisor, members of the Garrett Planning Network and the National Association of Personal Financial Advisors all abide by the fiduciary standard. If your advisor is fee-based, search for the brokerage’s ADV filing with the U.S. Securities and Exchange Commission. The document includes information that spells out how brokers at the company are compensated.


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