When searching for a financial advisor, there are different ways they can receive payment, such as through fees. Fee-only advisors and fee-based advisors may seem similar, but there are important distinctions to be aware of because they can affect the quality of advice you receive as a client. Here are what you should understand about fee-only and fee-based financial planners.
What is a fee-only financial planner?
A fee-only financial planner is a professional who charges fees for their services and does not receive commissions for selling specific financial products. The fees can be an hourly rate, a flat fee, or a percentage of assets being managed, usually around 1%.
It’s important to hire a fee-only advisor who acts as a fiduciary for their clients. This means they prioritize their clients’ interests over their own or their firm’s. Look for credentials such as a CFP or CFA, which are held to the fiduciary standard. When hiring an advisor, make sure to check their credentials and understand their payment structure. Asking about their payment structure is one of the most important questions to ask a financial advisor.
What is a fee-based financial planner?
Fee-based financial planners charge a fee for their services, but they might also get extra compensation related to the sale of particular financial products like mutual funds or insurance policies.
Fee-based financial planners do not have the same fiduciary obligation as fee-only advisors. Instead, they are only required to recommend investments that are appropriate for their clients. However, since these advisors may have a personal interest in selling specific products, a conflict of interest is possible. As a result, you may end up with investments that are appropriate for your goals and risk tolerance but not necessarily the most advantageous for you.
Compare fee-only financial planners vs. fee-based
Fee-only advisors receive compensation solely through the fees paid by their clients, while fee-based advisors may earn extra commissions from the sale of specific products.
Typically, it’s advisable to choose a fee-only advisor as they act as a fiduciary for their clients, meaning you won’t have to worry about any potential conflicts of interest when they make recommendations.
On the other hand, some individuals may choose to work with a sole financial planner instead of purchasing insurance from one agent and seeking investment recommendations from another. In such a scenario, hiring a fee-based advisor could be a viable option, but it’s crucial to comprehend how they receive compensation. It’s important to ensure that the advisor prioritizes your best interests rather than solely focusing on their own financial gain.
In the financial advising industry, there are two common fee arrangements: fee-only and fee-based. Fee-only advisors rely solely on the fees paid by clients, while fee-based advisors may earn fees from selling products. For most people, fee-only advisors are the recommended choice when selecting an advisor.