Fee-Only vs. Fee-Based Financial Advisors

Managing your money can be hard work. That’s why many turn to a financial advisor to ensure they’re on track toward their goals. However, there are plenty of types to choose from, and it can be difficult to know which one fits your needs.

As you begin your search for a financial expert, you may encounter people advertising themselves as either a “fee-only” or “fee-based” advisor. This refers to how each is compensated, of which there are big differences. In this article, we’ll explain how these payment structures work, the differences between them, and how to know what’s right for you.

Fee-Only Advisors

Fee-only advisors charge clients a specific amount for their time or services. You’ll only need to pay what you agree initially. This means no commissions or surprise costs down the line. Charging clients in this way eliminates conflicts of interest and promotes transparency.

Not every fee-only professional charges in the same way. There are several methods they may use, which you would agree to beforehand. Below are the most prevalent:

• Assets under management (AUM) percentage. It’s common for financial advisors to charge a percentage of your AUM. Often, this number hovers around 1%, but it varies depending on how much you have (the more you have, the smaller the percentage).
• Flat-fee. When you’re hiring an expert to take on a specific project, they may simply charge you a flat-rate, either once or ongoing. For example, you may pay this way for services like estate planning, retirement planning, tax planning, etc.
• Hourly. You may also be able to pay a professional on a per-hour basis. This is common for consultations or services you need to be done in person.
• Retainer. Another option for payment is an annual retainer. This is where you pay the advisor in advance for future services. However, you may receive a refund later if the actual costs aren’t equal. But this depends on who you hire.

Also of note is that fee-only advisors are mainly fiduciaries, in which they must put your best interest above all else. Because of their payment structure, they are much less likely to have a conflict of interest. For example, verified professionals such as registered investment advisors (RIAs), certified financial planners (CFPs), and chartered financial analysts (CFAs) all follow this payment structure.

Fee-Based Advisors

A fee-based advisor charges an amount for specific services or their time. However, unlike their fee-only counterparts, they also receive commission-based compensation. This means that they get a bonus if you buy financial products or make investments they recommend, such as:

• Index funds
• Mutual funds
• Exchange-traded funds (ETFs)
• Stocks and bonds
• REITs
• Insurance
• Annuities
• Private equity investments

Fee-based advisors aren’t fiduciaries. This is because they collect a commission, which creates an obvious risk of a conflict of interest. However, if they’re a broker-dealer that’s registered with FINRA, they must follow the suitability standard. With this, they may only suggest products or investments that are “suitable” for their clients.

Difference Between the Two

While the two sound similar, there are key distinctions between fee-only and fee-based advisors. The former only charges a specific amount for services they provide. The latter, however, means a professional may receive a commission for any products or investments they recommend.

An advisor with a fee-only structure doesn’t have the potential for a conflict of interest to arise. They have no real incentive tied to their compensation to guide you toward a certain product. And they’re often fiduciaries. In this way, you know they’ll operate with your sole benefit at the forefront.

With the potential for conflicts of interest, it can seem confusing that anyone would hire a fee-based expert. The key benefit of working with one, despite the risks, is that they may be able to give you access to more products and services at once. For instance, you could buy insurance, open a brokerage account, or invest all with the same professional.

Fee-Only	Fee-Based
Is a fiduciary that’s often registered with organizations such as the SEC, CFP Board, or CFA Institute.	Isn’t a fiduciary but follows FINRA’s suitability standard.
Charges fees for various services or by the hour. No commissions.	Takes a commission on top of the other fees for services or time.
May not have all of the financial products you need under one roof.	Can allow you more access to various products and services at once, such as insurance, portfolio management, and planning.

Deciding Which One Is Best

For most potential clients, advisors with a fee-only pay structure is a better choice. Their compensation structure doesn’t create any conflicts of interest and, most often, they’re fiduciaries. With this fact, you can rest assured that their top priority is your financial well-being.

However, there may be scenarios where a fee-based advisor is an acceptable choice. For instance, if you want access to more products and are comfortable with their lack of fiduciary duty, they may be worth it. But be sure to exercise great caution when you work with one. As they recommend products, you should do your due diligence and make sure it’s right for you.

Fee-based advisors may also charge less for certain services. Austin Scott, a CFP with Pinnacle Ascent Wealth Management in Washington state, says that “with ongoing advice, fee-based advisors will have a set fee that does not change on the accounts, and does not charge additional fees such as 12b-1 (for assets like mutual funds), trading costs, sales loads and others.” So, in this way, it may be beneficial to work with this type of expert. However, you should also weigh this with the other factors, such as them not being a fiduciary.

Ultimately, as you decide who to work with, be sure to think about what’s important to you. If transparency and objectivity are values you emphasize, a fee-only advisor is the way to go. The same goes for if you want someone who puts your needs ahead of their own. But if you want access to more products, a fee-based professional may work. Either way, you must hire someone who aligns with your goals and needs.

Frequently Asked Questions

Is a fee-only financial advisor better?

In most cases, yes, they’re better than a fee-based professional. This is because they uphold a fiduciary standard, in which they put your interests above theirs. The latter takes a commission if you buy certain products they suggest, so they may not be objective or transparent in their advice.

Does Fidelity offer fee-only services?

Fidelity Go, Fidelity’s automated portfolio management product, operates as a fee-only fiduciary. Any account with a balance of under $25,000 is free, but once it exceeds that amount, you must pay an additional 0.35%. Additionally, all robo-advisors are RIAs registered with the SEC.

What’s the main difference between fee-only and fee-based advisors?

The key difference is that fee-based advisors charge a commission on top of the other costs you must pay. This incentivizes them to recommend certain products or investments to you, even if they’re not in your best interest.

Fee-only advisors, on the other hand, are fiduciaries that don’t take a cut if you buy certain products. This allows them to be objective and honest as they help you build your portfolio or create a comprehensive financial plan.

Are fee-only experts more trustworthy than fee-based ones?

This, of course, depends on who you work with. But all things being equal, a fee-only advisor is more trustworthy because they don’t have the same risk for a conflict of interest due to their fiduciary duty.

Can fee-based advisors still act in my best interest despite potential conflicts of interest?

Yes, they can. However, this depends on who you hire. And, even if you like and trust the person you’re working with, you should always remain vigilant and carefully think about anything they recommend.

One thing to consider, though, is that fee-based who are broker-dealers must follow the suitability standard. This requires them to only suggest products or investments that are suitable for you. Keep in mind that this isn’t as strong as a fiduciary duty, but it’s still some type of regulation.