Is a Fee-Based Advisor the Same as a Fee-Only Advisor?

No. The term “fee-based” is a financial advisor who charges you a fee AND takes a commission. A fee-only advisor takes no commissions and is paid solely by their clients. Fee-only advisors – also called fee-only financial planners – are less likely to have conflicts of interest.

Most financial advisors are honest brokers who want the best for their clients. There’s nothing wrong with taking fees and commissions.  But there is some sensitivity about the fee-only industry. The “fee-based” phrase emerged in return.

Taking a commission on assets or services that a client buys is fine. As long as the advisor is acting in the best interest of their clients. Sometimes those lines get blurred. Or you’re not sure if they’re blurred – which might even be worse.

Some fee-based advisors recommend managed accounts. Ask the advisor if any of the assets in the account pay them (or the brokerage) commissions? Again, not suggesting anything shady is happening, but you need to know. And the advisor is required to tell you

That’s another reason why a fee-only advisor is such a good choice. Their income comes from their clients. If they’re recommending an investment, they expect it to do well for you. You don’t have to worry about why.

With some of the recent shenanigans on Wall Street, independent advisors are more important than ever.

Things to Know About Fee-Only Advisors

Any decision to let someone manage your money is a serious choice. The first thing is to consider what services you need. What’s your expectation for the relationship?

  • Want to start investing
  • Need advice on investing
  • Want to expand an existing portfolio
  • Need a comprehensive financial plan
  • Need a specific financial plan (i.e., college fund)
  • Need More saving for retirement

Different advisors offer different services. They also have different areas of expertise. Investing should always be governed by your goals and the strategy to reach them. Taking a minute to figure out what you need will help you chose the right advisor.

(READ: How to Start Investing)

Fee-only advisors are not inexpensive. There are multiple payment models.  You’ll get honest advice, but remember no advisor is right all the time. There is still risk in this relationship. Also, make sure you do some checking before making a choice. Education, experience, and existing clients are good indicators, also their record of performance.

Fee-only Advisors are Fiduciaries

Fee-only advisors are fiduciaries. A fiduciary is an individual with a legal obligation to act in their client’s interests. A fiduciary is being bound legally and ethically to act in the other’s best interests.

Financial advisors who are not fiduciaries are not under the same obligation.  They just need to recommend “suitable” assets or products. Suitable doesn’t necessarily mean the best value or best for your financial goals. Sometimes the best interests are for the advisor.

Payment Models

Fee-only advisors have a single source for payment – their clients. But there are different ways those payments are made.

Fee Structures

  • Charge an hourly rate for their services. Depending on the engagement, they may provide limited or comprehensive advice. Engagements may be one-time or ongoing.
  • Assets under Management (AUM): a percent of investment account value, around 1%. This approach may or may not include planning or advice. This is a money management service.
  • Charge a retainer: A retainer is a flat fee applied to a set of services. It could involve a financial plan or set of meetings about your portfolio.

Every financial advisor (including a fee-only advisor) is required to file with SEC. Their fees are public records, so before you sign up, check them out.

How much should you pay a fee-only advisor?

How much you pay will depend on several things – the fee structure, the value of your account, and how well your assets are performing. Advisors bill out much like lawyers. A typical hourly rate is $300 to $400. A flat fee can run between $2000 and $5000.

A recent industry study found that the annual AUM averages out at .95%. If you have $500 million in your account, that’s an annual fee of $ 4,750. Fees often accrue quarterly. Changes in your account performance will affect the payment amount.

The AUM percentage may adjust itself. After an account hits a certain value level, the percentage would drop.  Otherwise, it would be penalizing wealthier investors.

How to Find a Fee-Only Advisor

There are several resources to help you find the right advisor. The National Association of Personal Financial Advisors (NAPFA) is their professional trade association.

Their recommendation for finding and establishing a successful relationship includes a 5-step process:

  1. Have your goals clearly defined.
  2. Identify a group of advisors who interest you. Use the NAPFA database and recommendations from friends and family.
  3. Do some homework. Check their websites and ADV forms and look at their history on https://ww.sec.gov
  4. Put together a shortlist. Prepare some questions to ask your candidates
  5. Set up meetings (in person or virtual.) Ask the same set of questions of each. When the interviews are complete, review the responses and make your choice.

NAPFA maintains a database of fee-only professionals to help you find an advisor.

The Garrett Planning Network is another organization for fiduciary, fee-only advisors. Members charge an hourly rate, though some offer a retainment model. Garrett does not offer comprehensive financial planning. They focus on immediate needs – investment analysis, cash management, or business funding. There are no minimum income levels or net worth requirements.

Fee-Only Advisor Pros & Cons
advisor displaying success

Deciding on a fee-only advisor comes with strengths and limitations. These are a few of the pros and cons to consider.

Pro: No Conflicts of Interest

This is the most compelling reason for choosing a fee-only financial advisor. They are fiduciaries. Fiduciaries have a duty to act in your best interest at all times. They offer unbiased advice and recommendations to benefit their clients.

There are no commissions from the products they recommend. Their only compensation comes from clients. Comprehensive financial plans are driven by a client’s best opportunities.

A fee-based advisor does not have to follow the same legal standard. They must present “suitable” products to their clients. Which can include products or services which pay them commissions.

Pro: Fees are Transparent

A major advantage of a fee-only advisor is knowing how much their services cost. For most investors, that’s a comfortable way to do business.

Once the fee structure is agreed upon, there’s no gray area.  Fee-only advisors are paid under different models. There are hourly plans or flat fees. Some prefer a retainer arrangement. Many prefer to take an AUM percentage for managing your portfolio.

If you’re looking for a limited set of services, some advisors may be open to negotiation. Even if that’s not an option – you know what you’re paying and what you’re getting for it.

Pro: Comprehensive financial planning

Fee-only advisors can create a comprehensive financial plan. A simple financial plan focuses on a single initiative, i.e., the logistics of building a college fund. A comprehensive plan explores all aspects of a subject. A comprehensive retirement plan would include estate planning, trusts, income, and tax planning strategies.

Con: Still a risk of error

A fee-only advisor relies on their best judgment. Their judgment is going to be wrong sometimes. No financial advisor will ever hit the mark every time.

They can also be invested in certain performance models. This can affect how they service the account, sometimes overlooking alternatives that may be a better fit.

Con: Inclination toward wealthier investors

When your income is tied to a single source, you want to be sure of that source is well-funded. It’s common sense to assume the fee-only advisors look for clients with a higher net worth. Though their fees are transparent, they are also significant.

For new or smaller investors, the standard fees can block their participation. Fee-only advisors require an initial payment to start to begin the relationship. Depending on the fee structure, it could be anywhere from $3000 to $5000.  Someone with $20,000 will be deterred from services.

Con: Some products are less accessible 

Fee-only advisors offer advice and make recommendations. But most are not active players in determining managing the assets in your portfolio. If you want your advisor to be more hands-on, a fee-based advisor is a consideration.  If you want to look at a broader range of insurance products, commodities, or annuities, a fee-only advisor may need to refer you elsewhere.

Key Facts on Fee-only Advisors

Here’s a quick summary.

  • Fee-only advisors get paid by their clients and do not take commissions on products they recommend.
  • They are fiduciaries. Fiduciaries are legally and ethically bound to place the welfare of their clients first and foremost.
  • They offer unbiased advice. But can have preferences for certain performance models that limit their thinking.
  • NAPTFA and Garrett Planning Network are two professional organizations for fee-only advisors.
  • Advisor fees can be hourly, percentage-based, flat, or based on a retainer system.
  • Their fees are transparent but can be too high for smaller investors.
  • Some fee-only advisors may be more inclined to serve wealthier clients.
  • Fee-only advisors do comprehensive financial plans.
  • Don’t confuse fee-only advisors with fee-based ones, who can still collect commissions on top of the fees they charge.

If you’re considering a fee-only advisor, this should give you to tools to get started.

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