If a financial planner or financial advisor is fee-only, that means they receive compensation solely from the fees clients pay from their services. In other words, they do not earn commissions or kickbacks 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 in your area, try SmartAsset’s free matching tool.
What Is a Fee-Only Financial Planner?
Fee-only financial planners are financial advisors who operate on a fee-only basis. They typically collect fees from only you as a percentage of your assets under management. Fee-only advisors don’t receive any fees, commissions, referral fees, kickbacks or any other hidden forms of compensation.
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 to you to make money. They must operate as a fiduciary, guaranteeing they will work for your best interests.
“That doesn’t guarantee that you’ll get good advice, but it improves the odds of getting advice that’s genuinely intended to be in your best interests,” Matt Becker, a certified financial planner™ (CFP) and author of the blog Mom and Dad Money, told SmartAsset.
Without any ties to specific companies, fee-only financial planners are free to offer a wider array of solutions to help you reach your goals. On the other hand, commissioned planners tend to limit their suggestions to products that will earn them the most money. Some even focus on specific services their company provides, meaning you won’t get the holistic advice of a fee-only advisor.
There are some downsides to working with a fee-only financial planner, though. First off, their fees may be higher than advisors who earn commissions for selling products. That’s because their management and planning fees need to be higher to match the earnings of advisors who charge commissions.
In addition, a fee-only financial planner has, by nature, fewer services than one who earns commissions for selling insurance or trading securities. While a lack of commissions eliminates potential conflicts of interest, it does mean 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 is called “assets under management,” where your planner takes a percentage of the assets they manage. In this way, you would see a specific percentage-based amount debited out of your account every quarter.
Another method is to charge an hourly or monthly rate. While this ensures you pay for what you get, sometimes you don’t want to pay for a quick visit or phone call. Other fee-only advisors can charge clients with a flat fee or a fee according to what services they need. These kinds of payment plans allow advisors to work with a “more diverse set of clients and address a more diverse set of financial needs,” according to Becker.
It’s important to note that 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. Generally speaking, fee-only financial planners will charge between $150 to $400 an hour and between $1,000 to $5,000 annually.
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 compensation from commissions.|
|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.|
First and foremost, a fee-based advisor will receive normal advisory fees from clients, which is just like a fee-only advisor. However, where these two fee structures differ is in the additional forms of compensation they earn.
Like we indicate in the table above, a fee-only advisor’s sole form of compensation is the fees that clients pay them for their services. For a fee-based advisor, 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. Therefore, the vast majority of commissions that are earned by fee-based advisors come from securities trades within a client’s portfolio or insurance product sales to clients.
It’s important to note that potential conflicts of interest can arise from an arrangement like this. Fee-based advisors are required to follow a suitability rule, which means that the products they sell have to fit into the client’s goals and interests. However, commissions could create a conflict of interest because they incentivize advisors to recommend transactions and products that could undermine the investments of their clients.
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:
- Asset management fees: Most advisors charge a fee for investment management services, which is based on a percentage of the value of the assets that they manage for their clients. 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 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 and other securities for clients. As we noted above, fee-only advisors do not get paid via commission, but fee-based advisors can make money from client fees and commissions.
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
When it comes time to find your financial planner or advisor, a good place to start is asking your colleagues, friends and family. It’s especially important you ask people who are in the same financial situation as you. That way, they can recommend a suitable advisor for you.
You can also take automated route to finding an advisor. For example, SmartAsset offers a free financial advisor matching service that you can use to find advisors in your area. In fact, it will connect you with up to three advisors, though the final choice of who to work with is up to you.
Here are some other places to look for an advisor:
- 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 a 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: 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. If possible, set up an initial meeting before signing any kind of contract. Most planners won’t charge for this.
This meeting provides an opportunity to 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. Becker says that “financial planning is an intensely personal process that touches all aspects of your life, and you need to trust the person you are working with. If anything feels off, don’t hesitate to go in another direction.”
Before you overwhelm yourself with your financial planner search, it’s a good idea to start with the 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.
Fee-only financial planners offer the most upfront payment method of financial advisors. Getting good financial advice may seem expensive, but it should be worth it in the end.
Tips for Choosing a Financial Advisor
- Finding a fee-only financial advisor or financial planner doesn’t have to be hard. For example, SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors, get started now.
- Before you dive into looking for an advisor, you’ll need to 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 budget?
Photo credit: ©iStock.com/gustavofrazao, ©iStock.com/Rawpixel Ltd, ©iStock.com/Pekic