Fee-Based vs. Fee-Only Financial Advisors – Which Advisor Is Right for You?

The term financial advisor has different connotations for different people. For most people, a financial advisor is a professional who helps you make the right investment decision, aiming to maximize returns and minimize risk. Even though offering investment advice is part of a financial advisor’s job, it is not the whole picture. Typically, a financial advisor is someone who offers specialist guidance and support in all money-related matters, whether that includes something as elementary as budgeting or a complex requirement like estate and retirement planning or tax management. A financial advisor can be your go-to person for all aspects related to personal finance. 

However, all financial advisors are not the same. Some advisors offer specialized services, such as investment planning, tax management, etc., whereas others provide comprehensive financial planning services. Further, a major factor distinguishing these two broad categories of advisors is their fee structure. Financial advisors, streamlined or holistic service providers, use different ways to charge money from their clients. These professionals could earn through the fee-only method, where they exclusively get paid by you for their services. Alternatively, these professionals could use the fee-based structure, where they earn by commissions on products you buy through them. In some cases, a fee-based financial advisor or planner could also receive direct compensation from you for their services along with a commission. 

Both kinds of advisors – fee-only and fee-based – facilitate wealth management, but they differ in their workings. The fee structure of these professionals also impacts their work standards, principles, and ethics. Each type of fee model has its advantages and drawbacks. In some simple instances, it might be beneficial to engage with a fee-based financial advisor or planner, while in other more complex financial situations, hiring a fee-only financial advisor might be the right decision for your financial well-being. Therefore, before committing to a professional, try to understand the financial advisor’s fees, the fee-based vs. fee-only model, and which structure identifies best with your needs. Next, engage with a professional financial advisor when you have a clear idea about the kind of financial service you require and, based on that, you take a call on whether to go for a fee-only or fee-based financial advisor.

Here is an overview of the two prominent financial advisor fees models and how to select the right one for your financial situation:

What is a fee-only financial advisor?

Fee-only financial advisors are professionals who exclusively earn remuneration directly as a fee from you. These professionals offer financial planning services in exchange for an hourly or flat fee, or a percentage of the assets they manage on your behalf. Fee-only advisors do not receive any commission or payment from any other person, such as providers of financial products and services like asset management companies, insurance companies, etc. 

Some fee-only advisors, such as Fee-only CFPs (Certified Financial Planners) have a fiduciary duty towards their clients. This means that these advisors have a legal obligation to place your interest before their own. Hence, they would likely be more loyal to you than any broker, dealer, or other financial institution. Fee-only fiduciary advisors always put the client’s needs and benefits first and do not sell any investment product contrary to their needs, risk appetite, and financial goals. Further, the expert can offer you useful advice, per your financial circumstances. They can understand your preferences, risk tolerance, investment horizon, and more and conduct a thorough analysis of the investment product before making any recommendations. A fee-only fiduciary advisor also discloses all possible conflict areas and aims to minimize situations that could cause a clash of interests. Such an advisor will always place your interest before theirs, fulfilling their legally-binding fiduciary duty. 

Overall, a fiduciary financial advisor will:

• Place your needs before theirs.
• Act in your good faith and aspire to be honest and transparent in all dealings.
• Offer unbiased financial support.
• Unveil and minimize all possible areas of dispute.
• Deploy sincere efforts to offer ideal and profitable financial advice.
• Do not use your assets to fulfill their agenda or to gain any profits.
• Get direct compensation from you and engage in no commission-based trade.

If a fee-only fiduciary violates their duty, you can legally sue them and propose legal action (financial or civil). A fiduciary breaches the relationship if they do not honor their commitment, make uncalled financial transactions on your behalf, offer you biased financial advice for their benefit, sell financial products for a commission, misrepresent information, etc. 

Different types of fee-only financial advisors

Fee-only financial advisors use different fee structures to charge for their services. Three of the most common fee structures are:

• Flat-fee: In the flat-fee model, the advisor charges you a fixed sum for a particular duration. In this period, you can engage with them multiple times to seek advice on the agreed financial aspects, such as retirement, taxation, estate, etc. For instance, you could have an annual flat-fee structure with your financial advisor, where you pay a specific sum for their financial guidance services throughout the year. In this fee structure, the professional might charge a hefty sum in the first year. Subsequently, as the relationship advances and the financial plan is put into action, the advisor may reduce the fee.
  
• Hourly fee: In this fee structure,you are liable to pay the advisor per hour for their services. There is no contract or a long-term engagement.You pay as you avail of the services. For instance, if you want one-time taxation advice, you can ask the financial advisor to counsel you in the area and charge according to the hours involved. So, if you take three hours of services, you owe the advisor three times their hourly pay. 
  
• Asset under Management (AUM): AUM is one of the most common fee structures followed by fee-only advisors. According to the AUM fee method, the advisor charges you a specific percentage of the assets under management. AUM refers to the current market value of the assets/investments your financial advisor is managing on your behalf. As a rule, AUM includes only those assets or investments that are directly managed or invested by the financial advisor. According to the SEC (Securities and Exchange Commission), AUM refers to securities for which the financial professional provides ‘continuous and regular supervisory or management support’. Typically, under the AUM method, fee-only advisors charge anywhere between 1-2% of the total assets they manage. So, if your AUM is worth $200,000, you can expect to pay anywhere between $2,000 and $4,000 to your financial advisor. The exact percentage depends on the experience of the financial advisor and the type of services they provide. Even though the AUM method is often the most expensive fee model, it is also one of the most effective methods. In this fee model, the financial advisor directly benefits if your AUM value rises. Hence, they would work to the best of their ability to ensure you profit so that they get higher remuneration. Moreover, as your relationship with the fee-only financial advisor progresses, your AUM percentage will reduce as the value of your assets increase over time. In some cases, financial advisors also specify benchmarks with an asset-value goal. If your AUM rises to a specific level, your fee percentage is reduced accordingly. For instance, 1% for up to $2 million AUM, 0.70% for up to $3 million AUM, and 0.65% for all assets above this level. 

What is a fee-based financial advisor?

A fee-based financial advisor or planner is a professional who earns money by selling you particular financial products in addition to a fixed fee paid by their client. Fee-based financial advisors are compensated through the various financial products you may buy through them or the accounts you open through these advisors. Fee-based financial advisors may or may not get remuneration from you.

Fee-based financial advisors or planners can be more cost-effective than most fee-only financial advisors because they do not always charge any upfront fee. Fee-based advisors manage the entire financial product purchase and sale process, and you do not have to actively participate in these stages. 

Further, you are not always legally bound to a fee-based financial advisor and can engage with more than one fee-based advisor at a time. You could also hire a fee-only advisor while being actively involved with a fee-based financial advisor. Fee-based advisors usually work as independent contractors and for large corporations. Another benefit of working with a fee-based financial advisor is that you get access to a greater variety of financial product offerings, enabling you to create a diversified investment portfolio. 

Even though fee-based financial advisors are cost-efficient, they can have certain drawbacks. Some of these advisors may not adopt the fiduciary duty. Hence, the advice they offer can be useful but not ideal for your case. These professionals could recommend financial products keeping their profits in mind instead of your financial portfolio, life stage, or risk tolerance. The financial counsel offered by fee-based planners has a chance of being prejudiced. A fee-based financial advisor might also manipulate your account to generate a higher income, creating scope for a clash of interest. These professionals may or may not disclose all possible conflicts. So, the transparency in their operations is questionable. 

Fee-based vs. Fee-only advisors

What type of financial advisor is best for you?

The best type of financial advisor depends on your preferences and needs. If you need someone to only suggest to you the finest insurance plan you should buy, you can engage with a fee-based financial advisor because they could offer you suggestions while also being cost-effective and non-contractual. Alternatively, if you want someone to understand your financial preferences, risk tolerance, life stage, etc., and accordingly provide investment suggestions, you can consider engaging with a fee-only financial advisor. If you want overall financial guidance or aim to achieve a particular objective, like minimizing debt, optimizing taxes, creating a retirement corpus, preparing an estate plan, creating a budget, etc., you could benefit from the service model of a fee-only advisor. 

Understanding the differences between a fee-based and fee-only financial advisor enables you to make an informed choice aligned with your needs and goals. When evaluating the differences between the two types of advisors, it is also advised to analyze their advantages and disadvantages to get a comprehensive assessment and make the right choice.

Advantages of hiring a fee-only financial advisor

The benefits of hiring a fee-only financial advisor are:

1. Governed by a fiduciary duty to act in your best interest at all times.
2. Ensure transparency in functioning and reporting
3. Aim to disclose and minimize all conflict areas aiming to bring both parties on the same page
4. No disharmony
5. Assurance of ideal and unbiased advice
6. Fixed and transparent fee model
7. Wider scope of services

Disadvantages of hiring a fee-only financial advisor

The drawbacks of hiring a fee-only financial advisor are:

1. More expensive compared to fee-based financial advisors
2. Require active participation on your part
3. Contract-based engagement

Advantages of hiring a fee-based financial advisor

The benefits of hiring a fee-based financial advisor are:

1. Cost-effective than a fee-only advisor
2. May not have upfront charges
3. No contract-based engagement
4. A passive participation in the investment buying and selling process

Disadvantages of hiring a fee-based financial advisor

The  drawbacks of hiring a fee-based financial advisor are:

1. May not hold fiduciary duty
2. Risk of receiving biased advice
3. Conflict of interest
4. Lower transparency
5. Multiple income sources

To conclude

Overall, there is no direct answer to which fee structure is superior. The choice between a fee-based vs. fee-only advisor depends on your financial requirements. Fee-based financial advisors are generally more beneficial if you have a smaller portfolio that requires minimal management. In contrast, if you have wide financial needs or complex portfolio arrangements, a fee-only advisor can be a better choice. The key is to unearth your requirements and, accordingly, make a choice. Irrespective of the type of fee for service financial advisor you select, be sure to conduct necessary due diligence before advancing in the relationship. You can use the Wiser Advisor’s Free Advisor Match Tool to find a suitable pre-screened professional financial advisor in your area. Answer a few questions about yourself and get matched with 1-3 fiduciary advisors that are suited to meet your financial requirements.