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.

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.

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.

Fee-only financial planners vs. fee-based

The main difference between fee-only advisors and fee-based advisors is that fee-only advisors earn no additional compensation beyond the fee that is paid to them by clients, whereas fee-based advisors may also earn commissions on the sale of certain products. That distinction may seem small, but the right compensation incentives align the advisor’s interest with the client’s.

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 typically you won’t have to worry about potential conflicts of interest when they’re making recommendations.

However, some people may prefer to work with a single financial planner rather than buying insurance from one person and getting investment advice from someone else, for example. In this case, a fee-based advisor may make sense, but make sure you understand exactly how they’re being compensated. You’ll want to make sure that you’re doing things that are in your best interest, not just lining the wallet of the advisor with sales commissions.

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.