A fee-only financial planner sounds strikingly similar to a fee-based financial planner, but there's a big difference in how they get paid.
Fee-only vs. fee-based
Fee-Only Financial Planner | Fee-Based Financial Planner |
Paid directly by clients for their services and can’t receive other sources of compensation, such as payments from fund providers Act as a fiduciary, meaning they are obligated to put their clients’ interests first
| Paid by clients but also via other sources, such as commissions from financial products that clients purchase Brokers and dealers (or registered representatives) are simply required to sell products that are "suitable" for their clients
|
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What is a fee-only financial planner?
A fee-only financial planner is paid directly by clients for their services, be it a flat fee, hourly rate or a percentage of assets under management. The latter is typically around 1% of a client’s portfolio’s value each year. Their fee-only pay structure means they do not receive commissions or other payments from the providers of financial products they recommend to clients.
Fee-only financial advisors act as a “fiduciary,” a term you may hear thrown around; it means they are obligated to put their clients’ interests first. Ask if your financial planner is a registered investment advisor or a certified financial planner — both types are fiduciaries. This is an important consideration when choosing an advisor.
What is a fee-based financial planner?
A fee-based financial planner gets paid by the client but also via other sources, such as commissions from financial products that clients purchase. This can set up a conflict of interest, as the advisor charges you for advice while steering you toward investment products from which the advisor profits.
Ask if your financial planner is a broker or a dealer, also known as a registered representative. These planners are generally held to a lower legal standard, which simply requires them to sell products that are “suitable” for their clients.
» Learn more: Compare financial advisor fees, from low-cost robo-advisors to specialized human advisors
If your advisor is fee-based, search for the brokerage’s Form ADV filing with the U.S. Securities & Exchange Commission. The document includes information that spells out how brokers at the company are compensated. (It's a good practice to check Form ADV before you hire any financial advisor. In addition to explaining fee structure, it lists past misconduct if there is any.)
Fee-only financial planner or fee-based: Which type is best for me?
Financial planners are paid in a variety of ways, but understanding if your advisor is getting payments for steering you toward certain mutual funds or other financial products is important — and raises questions about conflicts of interest. A “suitable” investment for you may not necessarily be the most cost-effective option.
That's why we recommend choosing a fee-only financial planner who follows the fiduciary standard. There are several professional groups that require members to abide by the fiduciary standard. Those include: The National Association of Personal Financial Advisors, Garrett Planning Network, XY Planning Network and the Alliance of Comprehensive Planners.
Cost is another factor to consider. In general, there are three levels of financial advisor rates you'll encounter, depending on the types of services they provide.
Low-cost, investment-only help: Robo-advisors are a digital services that provide low-cost investment management. You answer questions online, then computer algorithms build an investment portfolio according to your goals and risk tolerance. Robo-advisor fees frequently start at 0.25% of the assets they manage for you, with many top providers charging 0.50% or less. On a $50,000 account balance, 0.25% works out to $125 a year. (Sound right for your needs? See our top picks for best robo-advisors.)
Mid-range financial planning and portfolio management: For a bit more than robo-advisors charge but less than you'd pay a traditional financial advisory firm, you can get comprehensive financial planning advice along with investment management. Examples of services in this space are Facet Weath and Empower.
A basic online service might offer the same automated investment management you’d get from a robo-advisor, plus the ability to consult with a team of financial advisors when you have questions. More comprehensive services roughly mirror traditional financial planners — you’ll be matched with a dedicated human financial advisor who will manage your investments and work with you to create a holistic financial plan.
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Higher-end, in-person, traditional financial management: At the high end of the spectrum are wealth management firms that provide investing and financial planning services to typically high net worth clients. Like robo-advisors, they tend to charge a percentage of the amount managed. But some require at least $250,000 in investable assets to get started, and the median fee in the industry is a much-higher 1%. Others may charge a flat fee, an hourly rate or a retainer.
FAQs
Fee-only financial planners get paid by you directly; fee-based planners may also earn commissions on products they sell.
What is the difference between fee-based and fee-only financial planners? ›
As we noted above, fee-only advisors don't get sales commissions; fee-based advisors do. No matter which type of financial advisor you work with, you should always know how much they will charge you.
What is the difference between fee-based and fee-only CFP board? ›
fee-based. The main difference between fee-only advisors and fee-based advisors is that fee-only advisors earn no additional compensation beyond the fee that is paid to them by clients, whereas fee-based advisors may also earn commissions on the sale of certain products.
What is the meaning of fee-based? ›
used to describe a person that you pay a fixed price for advice, a service, etc.: Although many advisers are switching to a fee-based service, the majority still survive on a commission basis. (Definition of fee-based from the Cambridge Business English Dictionary © Cambridge University Press)
Is 2% fee high for a financial advisor? ›
Most of my research has shown people saying about 1% is normal. Answer: From a regulatory perspective, it's usually prohibited to ever charge more than 2%, so it's common to see fees range from as low as 0.25% all the way up to 2%, says certified financial planner Taylor Jessee at Impact Financial.
What is the difference between fee-only and fee-based? ›
Fee-only financial planners get paid by you directly; fee-based planners may also earn commissions on products they sell. Ask any advisor how they make money. Kevin Voigt is a former staff writer for NerdWallet covering investing.
Why choose a fee-only financial planner? ›
Many financial advisors are shifting to a fee-only compensation structure, where they receive a fee for their planning services in lieu of traditional commissions. The benefits of fee-only include transparency, no hidden charges, and no conflicts of interest to sell a certain product line or company offering.
Is a fee-only financial advisor better? ›
Fee-Only Advisors' Primary Focus Is Your Best Interest
"Their standard of advice is much higher than practitioners who practice under the suitability standard," says Marianela Collado, CEO and senior financial advisor at Tobias Financial Advisors in Plantation, Florida.
Can fee based financial planners make money through commissions? ›
The term 'fee-based' describes a kind of financial advisor who receives some or all of their income from fees paid to the advisor by the client. Many fee-based advisors not only receive pay from clients but also earn commission from brokerage firms, mutual fund companies, or insurance companies when they sell products.
Can a CFP be fee based? ›
A CFP® professional may describe his or her or the CFP® Professional's Firm's compensation method as Fee-Only only where: (a) the CFP® professional and the CFP® professional's Firm receives no Sales-Related Compensation; and (b) Related Parties receive no Sales-Related Compensation in connection with any Professional ...
A fee-based service is usually offered by a financial advisor who charges an annual percentage of the client's assets as a flat fee for all or most professional services.
How does a fee based account work? ›
Fee-based account basics
In fee-based investment accounts, advisors and the investment or mutual fund dealers they work for will typically charge an account fee for advice, access and service directly to the investor. This fee is usually disclosed and arranged up front, and is often based on the assets in your account.
What is an example of fee based income? ›
Fee income is the revenue taken in from account-related charges. Charges that generate fee income include non-sufficient funds fees, overdraft charges, late fees, over-the-limit fees, wire transfer fees, monthly service charges, and account research fees, among others.
Is 1% too high for a financial advisor? ›
But they don't offer their advice for free. While the typical annual financial advisor fee is thought to be 1%, according to a 2023 study by Advisory HQ, the average financial advisor fee is 0.59% to 1.18% per year. However, rates typically decrease the more money you invest.
At what net worth should I get a financial advisor? ›
Generally, having between $50,000 and $500,000 of liquid assets to invest can be a good point to start looking at hiring a financial advisor. Some advisors have minimum asset thresholds. This could be a relatively low figure, like $25,000, but it could $500,000, $1 million or even more.
Are advisor fees tax deductible? ›
No, they aren't. At least not anymore. The Tax Cuts and Jobs Act (TCJA) of 2017 put an end to the deductibility of financial advisor fees, as well as a number of other itemized deductions. As of January 2018, these fees no longer contribute to reducing your tax bill.
Is a fee-based financial planner worth it? ›
Fee-based advisors could be helpful for people who don't want to work with multiple financial professionals though. If you want to buy insurance from the same person who created your financial plan, some fee-based advisors can do that for you. You also simply might have an advisor you like who happens to be fee-based.
Can fee-based financial planners make money through commissions? ›
The term 'fee-based' describes a kind of financial advisor who receives some or all of their income from fees paid to the advisor by the client. Many fee-based advisors not only receive pay from clients but also earn commission from brokerage firms, mutual fund companies, or insurance companies when they sell products.
What is fee-based in financial services? ›
What Are Fee-Based Services? The term fee-based services is a source of confusion. Usually, a fee-based service is offered by a financial advisor who charges an annual percentage of the client's assets as a flat fee for all or most professional services. The average fee is 1% to 3% of the assets.
