investing

Fee-based or fee-only financial advisers?

The differences between the fee models
The differences between the fee models © wavebreakmedia/Shutterstock.com

The fee-only and fee-based models both involve paying direct or indirect fees to a financial service professional. However, fee-only advisers agree to receive all compensation solely from clients. Typically, these advisers charge clients a one-time flat fee, an hourly fee, an annual fee or a percentage of the client's assets.

Advisers who agree to be compensated under the fee-only model cannot charge commissions. That helps them steer clear of conflicts of interests, says Samuel Scott, a fee-only planner and president at Sunrise Advisors in Leawood, Kan.

"Everyone wants to have their financial professional sitting on the same side of the table," he says.

In contrast to fee-only advisers, fee-based advisers can both charge fees and receive commissions.

"Fee-based is similar to saying 'fee and commission,' but the word 'commission' often has a negative connotation," Lemoine says.

A recent investigation by Wall Street Journal financial reporter Jason Zweig noted that some fee-based advisers might be misleading customers about how they are compensated.

Zweig found that a small percentage of financial planners who work for brokerage firms and insurance companies sometimes bill themselves as "fee-only" when in fact the firm they work for charges commissions.

Financial advisers who earn the Certified Financial Planner designation cannot characterize themselves as "fee-only" if any "related party" -- including the adviser's employer -- receives commissions, Zweig reported.

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