If a financial planner, financial advisor or another type of financial professional is fee-only, that means they receive compensation solely from the fees clients pay for their services. They do not earn commissions for recommending certain products. A fee-only structure reduces potential conflicts of interest, which is why these types of advisors are often preferable. To find a financial advisor who serves your area, try SmartAsset’s free matching tool.
What Is a Fee-Only Financial Planner?
Fee-only financial planners are advisors who operate on a fee-only basis to create budgets, plan retirement, pay down debt and set goals to reach other financial milestones. They typically collect fees from only you as a percentage of your assets under management (AUM).
Fee-only advisors don’t receive any fees, commissions, referral fees, kickbacks or any other hidden forms of compensation. They are also often a registered investment advisor (RIA) with either the U.S. Securities and Exchange Commission (SEC) or a state-level institution.
This payment structure can reduce the chances that the advisor will encounter a conflict of interest. Fee-only financial planners don’t earn additional compensation by recommending one investment product over another. In fact, fee-only financial planners work according to their fiduciary responsibility, meaning they must act in their client’s best interests.
Pros and Cons of Fee-Only Financial Planners
The best part of working with a fee-only financial planner is knowing that they are there to serve your best interests. They are there to help you out with your finances and not their own, as fee-only advisors don’t rely on what they sell you to make money. They must operate as fiduciaries, guaranteeing they will work for your best interests.
There are some downsides to working with a fee-only financial planner, though. Their fees may be higher than advisors who earn commissions for selling products because their management and financial planning fees need to be higher to match the earnings of advisors who charge commissions.
Also, a fee-only financial planner has, by nature, fewer services than one who earns commissions for selling insurance or trading securities. That means you’ll have to deal with another professional for trades and the purchase of insurance products.
What Fees Do Fee-Only Financial Planners Charge?
Fee-only financial planners charge their clients in a few different ways. The most common method involves charging a percentage of the client’s assets under management, which are the funds that the planner or financial advisor is responsible for handling.
Another method is to charge an hourly or monthly rate. Other fee-only advisors can charge clients a flat fee or a fee according to what services they need. Also, there are financial planners who work only with high-net-worth clients. This means that they will end up costing more since they are working with more assets.
The exact cost of a fee-only financial planner will depend on the way they charge their clients, the services you require and your location. More experienced advisors may charge higher fees as well.
Fee-Only vs. Fee-Based Financial Advisors
Fee-only financial advisors are just one type of advisor you can work with. The other is called a fee-based financial advisor. While the term “fee-based” is often confused with fee-only, fee-based advisors operate much differently. The table below breaks down some key differences:
Financial Advisors: Fee-Only vs. Fee-Based
|Fee-Only Financial Advisors||Fee-Based Financial Advisors|
|Clients typically pay directly for services, and advisors cannot make money from commissions.||Clients typically pay directly, but advisors can get additional commission-based compensation.|
|Advisors always have a fiduciary duty to put the financial interests of their clients first.||When initiating certain financial transactions and product sales, advisors must follow a suitability rule which says they must suit the client’s needs. Fee-based advisors also abide by fiduciary duty.|
A fee-based advisor will receive normal advisory fees from clients, which is just like a fee-only advisor. However, product- and investment-based commissions can be earned on top of advisory fees. In most cases, these commissions come from the advisor’s role as either a representative of a broker-dealer or an insurance agent.
Such persons are only required to meet what is called the suitability standard. This requires only that investments be suitable to the investor’s circumstances and may allow a broker to recommend an investment that is more costly and generates a higher commission than a similar low-priced option.
The fiduciary standard requires that financial advisors act only in the client’s best interest, which is the same as the one that attorneys and medical doctors follow. They must fully disclose any conflicts of interest, including whether one recommendation pays a higher commission than another that is virtually the same, except for the commission. The advisor is further required to make sure that any conflicts that do exist don’t affect the advice given.
What Types of Compensation Do All Financial Advisors Receive?
Financial advisors typically receive payment directly from their clients. But depending on the service, their compensation can vary. You can generally break down financial advisor fees into three categories:
Financial Advisors: Types of Compensation
|Asset Management Fees||Most advisors charge a fee for investment management services, which is based on a percentage of the value of the assets they manage. These fees could be charged quarterly, and percentages could be lower depending on how much you have invested. Some advisors may also charge performance fees when they exceed a return benchmark for their clients.|
|Financial Planning Fees||Advisors usually charge an additional hourly fee or flat fee that is based on the cost of engagement for financial planning and consultant services. These are available as a standalone service or alongside investment management services that come with fees as a percentage of assets.|
|Commissions||Some advisors make money on the side with commissions, but clients aren’t responsible for paying these. Brokers and dealers compensate advisors every time they sell a finance product like an annuity or buy and sell mutual funds or other financial products for clients. As we noted above, fee-only advisors don’t get sales commissions; fee-based advisors do.|
No matter which type of financial advisor you work with, you should always know how much they will charge you. Understanding how advisors get make money will also help you identify any potential conflicts of interest that could undermine your investments.
How to Find and Vet Fee-Only Financial Advisors
Besides asking your colleagues, friends and family for recommendations, you can also take the automated route to find an advisor. For example, SmartAsset offers a free financial advisor matching tool that you can use to find advisors who serve your area, though it includes both fee-only and fee-based financial advisors. It will connect you with up to three advisors, with the final choice of who to work with being up to you.
Here are some other places to look for an advisor:
Resources to Find Fee-Only Financial Advisors
|National Association of Personal Financial Advisors (NAPFA)||You can use NAPFA’s online search tool to find a local and experienced fee-only advisor. To become a NAPFA-registered financial advisor, advisors need experience and fiduciary duty. All NAPFA-registered financial advisors operate on a fee-only basis.|
|Certified Financial Planner (CFP) Board||The CFP Board also has a directory of planners with advisory qualifications. Being a CFP doesn’t assure fee-only service, but it does guarantee educated, experienced and ethical advisors.|
|Garrett Planning Network (GPN)||This fee-only planner organization connects you with advisors that charge at an hourly rate. Due to the overlap of company missions, some GPN members may be a member of NAPFA as well.|
Once you’ve narrowed down your list of potential advisors and planners, do your homework to find the best fit. Try to set up an initial meeting so you can ask key questions of your potential advisor. Ask about their experience, education, any criminal background, their specialty, their services and anything else you find relevant.
Before you overwhelm yourself with your financial planner search, it’s a good idea to start with fee-only planners. That way, you have a guarantee the advisors you begin with will already have a fiduciary responsibility. You also know that they won’t have any incentives to sell you a product or service for their own gain.
Tips for Choosing a Financial Advisor
- A financial advisor can offer valuable insights into a broad range of matters, including comprehensive financial planning services, retirement planning, estate planning and investing. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Before looking for an advisor, determine what it is you want from an advisor. Are you ready to get into investing yourself, or do you want the advisor to manage your investments for you? Do you need help creating a financial plan?
Do you want to learn more about financial advisors? Check out these articles:
Photo credit: ©iStock.com/gustavofrazao, ©iStock.com/Rawpixel Ltd, ©iStock.com/Pekic