Fee-only vs fee-based financial planners: In this article we will discuss what you need to know to help you hire the right professional!
What is a Fee-Only Financial Planner?
A fee-only financial planner or advisor operates with cost transparency in that they receive compensation solely from client fees. These fees can take various forms, such as hourly rates, fixed fees charged monthly to yearly for specific services, or a percentage of assets under management (AUM) billed out of an investment account. Importantly, fee-only planners and advisors do not earn commissions or incentives from recommending particular financial products. The fee-only model increases the likelihood that the advisor’s interests are as aligned as possible with those of their clients, as their income isn’t tied to selling specific investments or insurance policies.
In choosing a fee-only planner or advisor, clients often benefit from recommendations tailored to their unique financial situation without the worry that the advisor has recommended they purchase a product just because the advisor will receive a large commission. Whether it’s retirement planning, investment management, or estate planning, fee-only advisors are legally required to prioritize the client’s best interests above all else in the form of a fiduciary relationship.
What is a Fee-Based Financial Planner?
A fee-based financial planner or advisor may charge fees for their planning services but can also earn commissions from recommending or selling financial products like mutual funds, insurance policies, or annuities. Fee-based advisors operate under a dual compensation structure that introduces additional potential conflicts of interest. Fee-based advisors may face pressures from financial institutions to recommend products that yield higher commissions rather than those that are truly optimal for their clients’ needs.
Clients working with fee-based advisors should be aware of these potential conflicts and regularly request transparency in their advisor-client relationship. While fee-based advisors can provide valuable guidance, clients should evaluate the prevalence of product recommendations with the advice they receive and consider whether the recommendations align with their long-term financial objectives.
Fee-Only vs Fee-Based
Here are a few comparisons of fee-only vs fee-based financial planners and advisors:
Fiduciary Duty
Fee-only planners and advisors operate as fiduciaries, legally obligated to act in their clients’ best interests at all times. This duty helps to make sure that recommendations prioritize client needs over personal gain. Fee-based advisors may not always be fiduciaries, potentially allowing additional conflicts of interest to influence their advice. This concept is also referred to as the advisor “wearing two hats,” meaning they wear a “fiduciary hat” when building client financial plans, and a “non-fiduciary sales professional hat” when selling products. It’s important to know that all compensation models have conflicts of interest. The goal should be to eliminate as many conflicts as possible and make those that still exist transparent.
Total Costs and Fees
Fee-only financial planners and advisors charge fees directly for their services. The absence of commissions typically means these professionals are not selling high fee insurance products. That said, total client costs are not always lower when working with a fee-only financial planner or advisor and in many cases can be an eye opener for clients not used to paying out of pocket for advice. Fee-based advisors in some cases might charge clients less out of pocket as they are reimbursed on the back end by financial institutions for selling commissionable products. In general, there is no universal rule as to which fee model will cost more or less to a client. This is highly specific to the client/advisor relationship and what services and products are being used.
Services Offered
Both fee-only and fee-based planners offer a range of services, such as retirement planning, investment management, estate planning, and tax planning. Fee-only planners and advisors may be more focused on comprehensive financial planning as their core offering, whereas fee-based advisors may emphasize investment management and product sales whether a client engages in planning or not.
Client-Centric Approach
Fee-only planners prioritize building long-term relationships based on trust and transparency. The fee-only compensation structure can eliminate many unnecessary conflicts of interest, allowing these professionals to focus on their clients’ financial well-being. Fee-based advisors also focus on building long-term relationships based on trust. Some fee-based advisors may face additional conflicts between earning commissions and providing unbiased advice, potentially compromising the client-advisor relationship. That said, there are many fee-based advisors who do incredible work for their clients and manage these conflicts with transparency and professionalism.
Personal Compatibility
Regardless of compensation structure, finding a financial advisor who aligns with your values, communication style, and financial goals is essential. Building a strong rapport with your advisor can foster an open dialogue and can improve the outcome of your financial planning efforts.
Which Type of Planner is Right For You? Factors to Consider
When selecting a financial planner or financial advisor, consider the following tips:
Fiduciary Duty
Ensure your advisor is held to a fiduciary standard, prioritizing your best interests above all else.
Total Costs and Fees
Evaluate the total costs associated with each advisor’s services, including investment management fees, transaction costs, and any additional charges. Never be afraid to ask your advisor exactly how they are paid.
Services Offered
Assess the range of services offered by each advisor and determine which aligns best with your financial needs and objectives. Is this advisor offering what I hope to receive by paying someone for help with my finances?
Client-Centric Approach
Choose an advisor who demonstrates a commitment to transparency, integrity, and personalized service regardless of what compensation model they work under.
Personal Compatibility
Seek out a financial planner or advisor that you feel comfortable discussing your financial matters openly and honestly with. This should be a two-way street where both parties feel great about the relationship and communication.
Frequently Asked Questions (FAQs)
What does fee-based mean?
Fee-based means that the advisor charges fees for their services but may also earn commissions from selling financial products.
What does fee-only mean?
Fee-only means that the advisor receives compensation solely from client fees and does not earn commissions from product sales.
Are fee-only financial advisors worth it?
Fee-only financial advisors can provide valuable services with transparent fee structures that align with client interests. The compensation model that the advisor works under is not the defining characteristic of the quality of service offered.
What is the difference between a fiduciary and a fee-only financial planner?
A fiduciary is legally obligated to act in their clients’ best interests, while a fee-only financial planner receives compensation solely from client fees. Fee-only financial planners and advisors are fiduciaries. Fee-based advisors also work as fiduciaries however it is possible for them to engage in a non-fiduciary capacity when selling products.
Is 1% a good financial advisor fee?
The appropriateness of a 1% fee depends on the services provided and the value delivered by the advisor. Clients should assess their total costs in relation to the quality of services received. Essentially, if the advisor is managing investments and charging 1% on an annual basis, what is the client getting for that 1%?
How do fee-only financial advisors make money?
Fee-only planners and advisors make money by charging fees for their services, such as hourly rates, fixed fees charged on a monthly or yearly basis,, or a percentage of assets under management billed to an investment account. The key factor here is that the client is billed either directly or from their investment accounts for the services rendered. The fee-only advisor is only compensated by the client.
Who We Are
Stage Ready Financial Planning is a fee-only financial planning firm based in Dayton, OH proudly serving individuals & couples over age 50 looking to retire early or at just the right time to live their dream life. Whether those dreams include escaping the midwest winters or simply living a life of happiness and abundance, we are here as your trusted partner to help prepare you for the next STAGE of life. Click here to learn more about us.