Fee-only financial planners vs. fee-based
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.
Key takeaways
- Fee-only financial advisors receive no compensation beyond the fee they charge their clients and typically act in their clients’ best interests.
- Fee-based financial advisors receive a fee from clients and may also receive a commission based on the investments they recommend.
- Selecting a fee-only financial advisor is generally best for clients seeking investment recommendations that align with their financial goals.
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.
Pros and cons of fee-only financial planners
| Pros | Cons |
|---|---|
| Typically fiduciaries who must act in their clients’ best interests | Can be expensive to work with |
| Don’t make recommendations based on commissions | May have limited access to financial products |
| Have transparent fee structures |
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.
Pros and cons of fee-based financial planners
| Pros | Cons |
|---|---|
| Often have access to a broad set of financial products | Commission-based recommendations can create a conflict of interest |
| Bundling of multiple products may allow for discounts | Fee structure may be less transparent |
| May offer a wide range of services |
Fee-only financial planners vs. fee-based: Which is right for you?
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 you won’t typically have to worry about potential conflicts of interest when they’re making recommendations.
However, working with a fee-based financial advisor can sometimes make sense. Here’s a quick look at when you might want to consider each type.
When to consider a fee-only financial advisor
Fee-only financial advisors charge their clients a fee but don’t earn commissions on the products they sell. Working with these financial advisors is best for:
- Clients who want objective financial advice that won’t create a conflict of interest.
- People seeking an advisor who will make investment recommendations that align with their financial goals.
- Those who want to work with an advisor who has a transparent fee structure.
- Clients who need financial planning in addition to investment advice.
When to consider a fee-based financial advisor
Fee-based financial advisors may earn a commission from the products they sell, which can create a conflict of interest. However, these advisors can still be a good choice for:
- Clients seeking recommendations of multiple products, such as investments, annuities and insurance.
- Those looking to all their financial advice and recommendations of specific financial products in one place.
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.
— Bankrate contributor Bob Haegele contributed to an update of this article.
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