What’s the difference between fee-only financial advisors and fee-based? Is one necessarily better than the other? What’s the best financial advisor company?
What's the difference between fee-only financial advisors and fee-based? Is one necessarily better than the other? What's the best financial advisor company?
Speaking broadly, there are two ways that financial advisors get paid. The first way is that they get paid for providing advice, and the second way is that they get paid for selling you a product such as a mutual fund, managed account, or insurance policy. When an advisor is 'fee-only' they only get paid for their advice, but when an advisor is 'fee-based' it means that they get paid both for providing advice as well as selling you a product.
Most advisors (including myself) who answer questions on Ask An Advisor are fee-only, so I'm sure you'll get a lot of responses that fee-only is the way to go. My take on it, however, is that it's less important how an advisor is paid than if there's chemistry between advisor & client and that the advisor has expertise in helping clients handle the issues that you're seeking assistance with. Also understand that even if you go with a fee-only advisor, chances are that they refer out things such as insurance and mortgages to folks who are paid on commission.
Similarly, there is no best advisory practice or advisory company. Clients and advisors can best be thought of as snowflakes - while they might look similar from a distance, up close you can really see that they are unique. Some factors that I would look at include:
- Geographic location - is it important to you that you be able to meet with an advisor face to face?
- Size of practice - would you rather work with a small boutique firm or a bigger firm that has a lot of name recognition?
- Practice philosophy - does the advisor/practice/company have a clearly stated philosophy and does that philosophy resonate with you? A lot of this can be lip service and marketing, can you tell if they actually walk the walk?
- Solo advisor vs. team? would you prefer only having one point of contact or do you prefer having access to more than one person, each of which specializes in a certain area?
- Use of technology - how does the practice utilize technology and are you comfortable with what they're doing?
Great question! This can be a confusing topic for those outside the investment industry. I've worked as a fee-based advisor, commission only advisor and now work as fee-only advisor. The easiest way to explain this is to review all three side by side.
The first difference is compensation.
Fee-only advisors work for their clients and ONLY get paid directly from them in one of three ways: an hourly rate, a fixed annual retainer or a percentage of the investment assets they manage for their clients.
Commission only financial advisors get compensated from the companies offering the mutual funds, annuities, life insurance, REITs etc. you buy from that advisor. The more transactions they do the more they get paid.
Fee-based advisors blend the commission only and fee only models. They may sell you a product and get a commission on the transaction or they may charge you a percentage of assets to manage your portfolio or they may do both.
The second difference is what standard of care they follow.
Fee-only advisors follow the Fiduciary Standard to always act in the best interest of the client. They must follow a duty of loyalty and care to their clients, disclose any conflict of interests, get the best execution possible when investing and do a thorough and accurate analysis of their recommendations.
Commission only advisors follow the Suitability Rule. They can sell products to their customers that they believe meets the customers' needs and objectives. They do not follow a duty of loyalty to their clients but instead are first loyal to their employing broker/dealer. Also, they do not have to disclose conflicts of interest.
Fee-based advisors follow either the Suitability Rule or the Fiduciary Standard depending on the situation. Unfortunately, you can never be exactly sure which standard they're following when they're making recommendations.
First, there is not guarantee that one is better than the other. It will boil down to which you work the best with.
Fee-Only: Cannot be compensated by any other source except directly from the client. No commissions, insurance sales, or investment company funding.
Fee-Based: Can be compensated by a fee as in the above scenario. Also may be compensated by commissions, insurance sales, or investment company funding.
A fee-only financial advisor works entirely on an hourly, project or asset based fee. A fee-only advisor is paid directly by the client. A fee-basedadvisor charges a fee to prepare a financial plan and then receives a commission. In my opinion a fee-only advisor has no inherent conflicts of interest. I am a fee-only financial advisor. I get paid the same regardless of what I recommend that the client do. A fee-based advisor has inherent conflicts of interest. Their commission varies based on what they recommend you buy. The commission on a whole life insurance policy is much higher than a commission on a term policy. Some mutual funds may have a 2% commission, other an 8% commission.
You ask if one is better than another. That's a tough question to answer. By better do you mean more intelligent or knowledgeable or more honest? That is a judgment call that only you can make.
Finally you must judge a financial advisor on their own merits, not based on the company they work for.
All these answers are excellent. I want to speak to the question of the best company to work with. You want to find an advisor who you feel comfortable with. One advantage of a smaller firm is that you will have an advisor who you work closely with. With larger firms, you won't have your own advisor unless your asset level is very high. I believe that independent advisors are the most objective and they make decisions based on your best interest. The NAPFA website can help you find someone near you.
This thread has been closed. Have a financial question? Log in and ask our community!