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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
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.
What is a fee-based financial service? ›
What Are Fee-Based Services? 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.
Can fee-based financial planners make money through commissions? ›
Many fee-based advisors not only receive pay from clients but also earn commission from brokerage firms, mutual fund companies, or insurance companies when they sell products. Fee-only advisors are a subsect of fee-based advisors who do not earn commission, so they are exclusively paid by clients.
Is it better to have a financial advisor or financial planner? ›
A financial planner generally takes a more comprehensive, long-term approach to money management. While they often hold the same licenses and carry out the same functions as financial advisors, financial planners tend to focus on creating personalized and holistic plans for clients.
What are the downsides of fee-only financial advisors? ›
Potential drawbacks of fee-only financial advisors. Even fee-only advisors can make errors. Fee-only advisors may not be the most affordable option. You may not get access to some services or products.
Are fee-only financial advisors worth it? ›
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.
What are the pros and cons of fee only financial advisors? ›
The benefits of fee-only include transparency, no hidden charges, and no conflicts of interest to sell a certain product line or company offering. The downsides of fee-only advisors can include being more expensive or a limited scope of products and services offered.
What is an example of a fee based service provided by a bank? ›
Charges that generate fee income include non-sufficient funds fees, overdraft charges, late fees, over-the-limit fees, wire transfer fees, monthly service charges, and account research fees, among others. Credit unions, banks, and credit card companies are types of financial institutions that earn fee income.
Is merchant banking a fee based service? ›
Therefore, merchant banking is a fee based service for management of public offers, popularly known as 'issue management' and for private placement of securities in the capital market. In India, the merchant banker leading a public offer is popularly known as the 'Lead Manager'.
How are fee-only advisors compensated? ›
Fee-Only planners are compensated directly by their clients for advice, plan implementation and for the ongoing management of assets. All NAPFA members are required to work only within the Fee-Only structure, accepting no commissions for their work.
Cost: The median AUM fee among human advisors is about 1% of assets managed per year, often starting higher for small accounts and dropping as your balance goes up. What you get for that fee: Investment management, and in some cases, a comprehensive financial plan and guidance for how to achieve that plan.
How does a fee-only financial planner work? ›
If a financial planner, financial advisor or another type of financial professional is fee-only, that means they receive compensation solely from the fees clients pay for their services. They do not earn commissions for recommending certain products, and this designation extends to the firm itself.
What is a disadvantage of hiring a financial planner? ›
Fees can be a huge drag on your portfolio's performance over time, so it's vital to know what you're paying and how much they cost you. Bankrate's investing calculator can show how much those fees will cost you over time. Spoiler: You could easily pay tens of thousands over a career. Uncertain qualifications.
Which type of financial planner is best? ›
A certified financial planner is a highly qualified advisor who has been awarded the CFP designation by the CFP Board. A CFP may understand a wide range of financial issues, and importantly is charged to act with a fiduciary duty to you as a client.
At what point is it worth getting a financial advisor? ›
Life events. Graduating college, getting married, expanding your family and starting a business are some major life events that might cause you to reevaluate your financial situation. A financial advisor can help you manage these life events while making sure you get or stay on track.
What are the benefits of fee based accounts? ›
The two main benefits of fee based RRSP accounts are the lower costs and the ability to pay the fees through additional contributions. Although the payment of the fees does not result in a tax deduction it enable investors to tax shelter more funds within their RRSP.
What are the benefits of fee only financial planners? ›
Many financial advisors are shifting to 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 to sell a certain product line or company offering.
What is the difference between fee based and fund based? ›
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. 7) Example: Some of the fund based services are hire purchase, factoring, bills discounting, venture capital, banking services etc.
Is 2% fee high for a financial advisor? ›
Most of my research has shown people saying about 1% is normal. Answer: From a regulatory perspective, it's usually prohibited to ever charge more than 2%, so it's common to see fees range from as low as 0.25% all the way up to 2%, says certified financial planner Taylor Jessee at Impact Financial.
