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The Difference Between Fee-Only and Fee-Based Financial Advisors

The Difference Between Fee-Only and Fee-Based Financial Advisors

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Many people feel that they could benefit from the help of a financial planner or financial advisor. However, before you decide to work with someone, it’s a good idea to make sure you understand how he or she is compensated. One of the most confusing things to do is figure out what it means when a financial advisor is “fee-only” or “fee-based.” In order to help sort out the situation, I asked Jeff Rose from Good Finance Cents and Soldier of Finance for a little illumination.

The Difference Between Fee-Only and Fee-Based Financial Advisors 1

Photo by CR Browning via Flickr

Fee-Only versus Fee-Based

Fee-Only Advisor

Jeff starts out by pointing out that fee-only planners are “paid directly by the client, and not from the sale of any investment product.” According to Jeff, there are four ways that a fee-only advisor can be paid:

  1. Hourly Billing: This is an hourly rate for working with you, simliar to the way a CPA bills, or an attorney would bill.
  2. Annual Retainer: You pay one price, and you get all the available services for a year.
  3. Fee for Service: Some financial planners might charge a fee for each separate service. So, you might pay a flat rate for a 401(k) review, or for a financial plan, or for some other service.
  4. Assets Under Management: This is a fee that is charged based on your assets. You pay a percentage of the assets the planner manages (usually 0.5% to 2.5% annually), and the amount is often just deducted from your account.

Before you you sign up, make sure you understand which type of fee you will be paying. “To find a true fee-only advisor,” Jeff recommends, “you should look at hiring a NAPFA registered financial advisor. They have a very strict selection process in allowing advisors to be part of their association.”

Fee-Based Advisor

A fee-based advisor, on the other hand, has the ability to sell an investment product or an insurance product for a commission. “A ‘fee-based’ advisor has the ability to do some of the above — depending on whether or not they are a Certified Financial Planner — but most of them do assets under management,” Jeff explains.

Most fee-based advisors hold a Series 7 license and/or a life insurance license, allowing them to earn a commission. However, fee-based advisors can also operate as fee-only advisors. “Essentially, they have the ability to go between the two,” Jeff says. “This can be confusing for a client because they may not know which hat the advisor is wearing: The ‘fee’ hat or the ‘commission’ hat.”

Which Advisor is Better for You?

As with all things personal finance, whether you decide to go with a fee-based advisor or a fee-only advisor depends on your situation. Jeff recently allowed his Series 7 to expire, so, from that standpoint, he could be considered a fee-only planner/advisor. “Recently, I gave up my Series 7 and formed my own Registered Investment Advisory firm, eliminating my ability to ever earn a commission on the sale of a security.” However, he still holds to the fee-based designation he used to have. “I have retained my insurance license, although I haven’t done any insurance business this year, I’m currently leaving the possibility open.”

Jeff points out that sometimes just choosing someone who is fee-only can backfire for some clients. “I like the fee-based model because not every client or situation is appropriate for one or the other. I’ve seen some fee-only firms that don’t have an account minimum but they may charge 2.25% a year to manage an account. Is that really a good fit for someone with a small account, just getting started? It’s tough to say.”

Being fee-based, Jeff indicates, allows the planner the ability to be flexible and charge according to what might work best for the client — and the client’s situation. However, that doesn’t let the planner off the hook for being up front with how he or she will charge you to manage your account. You should have an agreement, up front, about the way the advisor will be compensated for managing your account specifically.

“The number one question to ask a financial advisor is exactly how they get paid, and make sure you get a clear answer,” Jeff says. “If they use percentages, make sure they quantify that in dollars so you really know how much you are paying.”

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Mildred Williams
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Mildred Williams

If I am not working, and my financial planner for my 401K is the same person who will be responsible for my 401K rollover to IRA,how will he/she collect their fee for service from me? Do I pay an out-of-the pocket set fee or is there a percentage rate they will receive on a regular basis?

Pinyo
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@Mildred – there should be no fee to rollover your 401k to an IRA — you could do this yourself. Unless the planner is your personal planner who will be managing your investment for you, IRA are self-directed, e.g., you do it yourself, and you only pay transaction fees for buying and selling investment. If you are working with a planner (I am not talking about your 401k plan administrator), then you have to ask the planner about the fees. As for the rollover itself, there might be some transaction fees and redemption fees involve as you liquidate your investments… Read more »

The Difference Between Fee-Only and Fee-Based Financial Advisors

by Miranda Marquit time to read: 3 min
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