What is a fee-only financial planner? Fee-only vs fee-based financial advisors

If you’re looking for a financial planner, a financial advisor, or a wealth manager you may be confused about how their fees or cost structures work. When choosing a financial planner or adviser, it’s important to take into consideration how he or she is paid because different fee structures and external factors may influence the advice your planner gives you.

Some of the terms you will come across are fee-only and fee-based. Although they sound similar, it’s important to understand the difference between the two.

What is a Fee-Only Financial Planner?

Fee-only financial planners are financial planners who receive payment for their advisory services only in the form of fees paid by their clients for their advice. They are not compensated through commissions. Fees may be paid on an hourly rate; on a percentage of the amount of assets under management (AUM); with a flat project fee; or through a monthly retainer. Whatever the fee model, all advisory compensation is paid by the client.

One of the benefits of working with a fee-only firm is that there is no incentive to recommend certain financial products over other financial products. Other factors, such as geography, personal relationships, and overall costs may also influence your decision outside of fee-based and fee-only cost structures.

A fee-only financial advisor can also be a fiduciary, making him or her ethically bound to act in the best interests of his or her clients.

What is a Fee-Based Financial Planner?

A fee-based financial planner can also be a fiduciary, which commits them to make choices in their clients’ best interests. But, unlike fee-only planners, a fee-based financial adviser can receive commissions from some financial products. To maintain their fiduciary duty, the adviser must disclose to their clients any time they receive a commission to avoid any potential conflicts of interest and maintain fiduciary responsibility. A fee-based financial planning firm may have its own products, which they are incentivized to recommend. It is also possible the fee-based financial planning firm could be limited in its selection of investment products.

Fee-Only vs Fee-Based Financial Planners

Item Fee-Only Fee-Based
Advisory Fee Structure Paid by clients only Paid by clients and commissions
Fiduciary Duty* Yes Yes
Products Used Open architecture; can use any product May have incentives to recommend specific products or own products

*Financial planners registered with the SEC are fiduciaries.

Which is Right for You?

If you’re interested in finding financial guidance, understanding that this nuanced difference may be significant since fee-based allows for the possibility of a conflict of interest from commission compensation, whereas fee-only does not.

Here’s what the National Association of Personal Financial Advisors (NAPFA), the USA’s professional association of Fee-Only financial advisors, says about fee-only arrangements:

NAPFA’s position is that the Fee-Only method of compensation is the most transparent and objective method available. This model minimizes conflicts and ensures that your financial planner acts as a fiduciary.  

Source: https://www.napfa.org/financial-planning/what-is-fee-only-advising

This does not mean fee-based planners would not operate in the best interests of their clients. However, it is important to know that the incentive to recommend certain financial products over others is present in a fee-based structure, but not with a fee-only financial planner. Other factors, such as geography, personal relationships, and overall costs may also influence your decision outside of fee-based and fee-only cost structures.

Ask the Right Questions

When searching for financial planners, it’s important to know that they are not obligated to advertise their fee structure except in writing in their Form ADV. This is the document used by investment advisers to register with both the SEC and state securities authorities. The form consists of two parts, both of which are available to the public on the SEC’s Investment Adviser Public Disclosure (IAPD) website. When searching for financial counsel, be sure to ask about the fee structure, taking specific note of fee-only vs fee-based.  You should also ask if the firm is limited to a set of products or incentivized to utilize specific products.

About Modera Financial Planners

We are proudly a fee-only, independently-owned financial planning firm that acts as a fiduciary for our clients. We have built our organization to put our customers’ interests first, as evidenced by our fee-only fee structure and fiduciary responsibility.

If you’re interested in our services, please contact us. If you would like to learn more about financial planning, wealth management, and finding a financial advisor, please visit other areas of our education section.

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