- Fee-only advisors give financial planning advice to individuals and couples for a set fee based on the services they provide you.
- Fee-only advisors do not receive commissions from the sales of products.
- Fee-only and fee-based advisors have several differences to consider when deciding which type of advisor to work with.
- Read more stories from Personal Finance Insider.
Seeking a professional to help you manage your money is a great step to achieving your financial goals. But not all financial advisors are the same; some may offer varying services — and more importantly, they may have different fee structures.
A fee-only financial advisor will be one you’ll come across during your search. Here’s what to know.
What is a fee-only financial advisor?
A fee-only financial advisor is an advisor that’s paid on a set rate based on the services they provide a client, rather than being paid based on commission. These types of advisors act as a
, meaning that they’re required to make recommendations that are in a client’s best interest. While that seems like common sense, a lot of other advisors only act on a suitability basis, meaning that they only have to provide recommendations that are suitable for a client’s situation.
Fee-only advisors provide the following services:
- Listening to and giving advice on a client’s financial situation
- Implementing the client’s plan
- Managing the client’s assets on an ongoing basis
What’s the difference between fee-only and fee-based?
There are a few differences between fee-only advisors and fee-based advisors. Fee-only advisors do not receive any product sale commissions, such as those through the sale of life or disability insurance, mutual funds, or annuities. They charge clients a fee for their expertise and advice, and the opportunity to work together.
Fee-only advisors can be paid in a number of ways including:
- An hourly rate: Advisors are paid per hour for service provided.
- A retainer fee: Clients pay an ongoing fee to continue the advisor-client relationship.
- A percentage of assets under management (AUM): Advisors take a certain percentage, such as 1%, of all assets a client has under their management.
- A flat fee: Some advisors choose to charge a flat fee, typically paid monthly, semi-annually, or annually.
Fee-based advisors can be paid in a number of ways including:
- Commission-based model: Fee-based advisors can receive a fee from the sale of insurance and investment products.
- A combination of a commission and fee model: Fee-based advisors can receive a fee from the sale of products as well as a fee to give the client advice.
- Through a percentage based on assets under management (AUM): Like fee-only advisors, fee-based advisors can also charge a fee based on the amount of assets they manage for a client.
- Through an hourly or retainer model: Like fee-only advisors, fee-based advisors can also charge an hourly or ongoing fee for their advice.
There are oftentimes downfalls of working with fee-based advisors, mostly because they can still make commission off of product sales. “One [drawback] of working with a fee-based advisor is that there exists an inherent conflict of interest,” says Scott Turner, CFP and fee-only advisor at Rockstar Financial Planning. “You can’t tell if they are offering the best products, or they are only limited to selling their own proprietary/limited products offered by the company they work for or represent.”
Pros and cons of fee-only financial advisors
There are several pros and cons to fee-only financial advisors:
Pros of fee-only:
- Fewer conflicts of interest: Because fee-only advisors don’t accept payments on the sale of investment or insurance products they are able to make recommendations without the lure of receiving payment for such recommendations.
- Follow a fiduciary standard: Because there are fewer conflicts of interest, fee-only advisors make recommendations that are in the best interest of the client, holding them to a fiduciary standard.
- Client knows fees ahead of time: Fee-only advisors discuss how they are paid with their clients ahead of time, either by an hourly rate, ongoing fee, flat fee or percentage of assets under management.
Cons of fee-only:
- More expensive to work with: For those who need basic saving or budgeting advice, or want to purchase an investment or insurance product and don’t mind paying fees, then it may be less expensive to work with a different type of advisor.
- Will need to find products elsewhere: “Fee-only advisors don’t typically sell insurance, so they refer clients to a third-party insurance broker or salesperson. A fee-based advisor can often sell insurance directly to clients (although it might not be the best policy for the client),” states Matthew Jenkins, CFP and president of Noble Hill Planning, a fee-only financial planning firm.
The financial takeaway
Working with a fee-only financial advisor can be a great way for clients to get fiduciary financial advice that’s in their best interest. However, not all clients will be able to afford the fee to work with an advisor or can justify the fee they may charge to manage the client’s assets. While working with a fee-based advisor is also an option, potential clients need to understand the fees they charge and how they get paid in order to determine if it will be a good fit.
“Working with a fee-only advisor minimizes conflicts of interest, but just because someone is a fee-only advisor does not inherently mean they have the particular expertise you are looking for,” says Brandon Renfro, CFP and owner of Belonging Wealth Management. “You still need to vett a fee-only advisor to make sure they have the appropriate education and training to help you.”