Fee-Only vs. Fee-Based Advisors
A fee-only financial planner is compensated only by the fees he or she charges directly to clients and not by commissions earned from a sale of a financial product. An advisor compensated only by fees is called fee-only.
There is a huge different between a fee-only planner and a fee-based planner. And too often, the public is unaware of these differences. A fee-based or “fee and commission” advisor is generally compensated by both fees for advice and commissions on the sale of financial. Most fee-based advisors hold licenses that allow them to sell investment products or insurance for a commission.
As stated earlier, a fee-only financial planner is compensated only by the fees he or she charges directly to clients. Fee-based advisors generally do not have a “duty to disclose” their method of compensation and this can confuse clients who may not understand that they are also working for commissions.
There is an inherent bias with commission-based advisors. Basically, anytime someone is paid on a commission basis, there is going to be a natural motivation to sell products that pay out the highest commissions.
Conflicts of Interest
One of the major benefits of working with a fee-only advisor is that they have no inherent conflicts of interest and they generally provide more comprehensive advice. A fee-based advisor may carry an incentive to recommend a product with a higher payout to the advisor (or said another way, higher cost to the client).
The National Association of Personal Financial Advisors (NAPFA) is the leading professional organization of fee-only advisors. NAPFA is distinguished both by the competence of its advisors and their method of compensation. Another great resource to learn more is The Fee Only Network.
Typically, fee-only advisors conduct their business under a “fiduciary duty,” which means by law, they must have their clients’ best interest at heart. Many fee-only advisors carry professional designations that hold them to strict codes of professional and ethical conduct.
Fiduciaries must make sure their recommendations are based on accurate and complete information. That means they are required to thoroughly analyze your accounts, goals and circumstances before recommendations are made. Fiduciaries must then monitor their recommendation to make sure that it remains appropriate for their client on an ongoing basis.
A fiduciary advisor will help you minimize fees, avoid conflicts of interest and put you at the center of any financial advice. If your current financial advisor doesn’t seem to model these behaviors, consider finding one who does!