Fee-Based vs Fee-Only Financial Planner - What's the Difference?

There are several factors that will come into play when deciding which financial planner you want to work with. One important aspect of your relationship with a financial planner will be how that planner is compensated for his or her work. Generally, you will come across financial planners with two types of fee structures: fee-only and fee-based. It is important to know the difference between these two fee structures and fully understand how your financial planner will be compensated.

What Is a “Fee-Only” Financial Planner?

A fee-only planner is paid directly by his or her clients. They do not receive commissions for products sold. For example, a fee-only planner might charge a flat fee or hourly rate for financial planning or consulting work, or the planner will charge a fee as a percentage of the assets the planner is managing for the client. Fee-only planners act as fiduciaries, which means they must act in their clients’ best interests.

fee only financial planner
fee-based financial advisor

What Is a “Fee-Based” Financial Planner?

A fee-based financial planner is paid by clients but can also can receive commissions on financial products the client purchases. For example, fee-based planners can receive commissions from selling insurance policies. They may also receive brokerage commissions and commissions for selling mutual fund shares. A fee-based planner is not a fiduciary and is only required to recommend products that are suitable for his or her clients.

Fee-Based vs Fee-Only Financial Planner - Key Differences

  • A key difference between fee-only and fee-based financial planners is that fee-only planners are compensated only from their client, while a fee-based planner can also receive commissions from selling products.
  • Another important distinction is fee-only planners are fiduciaries and are required to act in their clients’ best interests, while fee-based planners are required only to recommend products that are suitable for their clients.
  • A major benefit of working with a fee-only planner is that because they are not paid commissions on products sold, the planner wouldn’t be exposed to the potential conflicts of interest a fee-based financial planner could face.
  • A fee-only financial planner is a fiduciary and is required to act in their clients’ best interests at all times.
  • With a fee-only financial planner, the client can have a clearer picture of exactly how the planner is compensated, since the compensation is coming directly from the client. This more “transparent” pricing model appeals to many, and it can make costs more predictable.
  • Some fee-only planners might not have the expertise on products such as insurance or annuities, and in some cases, there might be limitations on the products a fee-only planner can offer.
  • Some fee-only planners can be more expensive to work with for some investors.
  • Some fee-based planners work closely with insurance and annuity companies, so they may have extensive knowledge of the financial products those companies offer. If you are mainly interested in insurance or annuities, it might make more sense to work with a fee-based planner.
  • Fee-based financial planners can be less expensive than fee-only planners. Working with a fee-based planner might make more sense for those investors with a smaller portfolio.
  • There can be conflicts of interest if the planner is compensated for the products he or she sells in addition to the fees the planner charges the client.
  • The way in which fee-based planners are compensated can be less transparent than fee-only planners.
  • There may be a greater chance of exposure to “hidden fees” when working with a fee-based planner.
  • Many fee-based planners are not required to act as fiduciaries and are only required to recommend products that are suitable for their clients.

Fee-Only vs. Fee-Based Advisors: Which Is Best for You?

Whether you decide to work with a fee-only or fee-based financial planner, you still need to do your due diligence and make sure the planner has the appropriate experience and qualifications. Talk with the planner about how his or her experience and qualifications can help you achieve your financial goals. A fee-only planner must act as a fiduciary, but that does not guarantee the planner will offer you good advice. It is always smart to ask your planner why he or she is recommending certain investments and how that recommendation will be in your best interest.

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