Fee-Based and Fee-Only Are Not the Same When it Comes to Financial Advisor Compensation

Home / Fee-Based and Fee-Only Are Not the Same When it Comes to Financial Advisor Compensation

"Consumers are seeking out advisors that are fee-based when they are really intending to find a fee-only financial advisor.  The two compensation methods are not interchangeable."

- Allan Slider, Founder of FeeOnlyNetwork.com

Many investors who are looking for help with their financial planning and wealth management strategy have heard that an advisor’s fee structure matters.  Often, when an investor is looking for a financial advisor, they search for a fee-based advisor thinking they’re signing on to work with an advisor who is fee-only. This presents a problematic conflict of interest, and poses a challenge for consumers who want to work with advisors who are specifically fee-only.

This confusion comes because, at a high level, advisor fees seem to be relatively straightforward from a consumer’s perspective. Advisors are either compensated with commission, or by the fees their clients pay them. However, there’s an additional layer of complexity to advisor compensation that can be confusing:

Some advisors who are compensated by the fees their clients pay are also compensated with commissions from the sale of financial products.

These advisors are called “fee based” instead of “fee-only”. Fee-based compensation is split into two parts:

  1. An advisor does receive a fee for services from their clients.
  2. The same advisor also has access to financial products that they can sell to clients and earn a commission.

A fee-only advisor, on the other hand, is only compensated with the fees paid to them by their clients. Let’s dig into what advisor fee structures entail, and how investors can find an advisor who truly has their best interest at heart.

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 • Paid by clients but also via other sources, such as commissions from financial products that clients purchase
• Act as a fiduciary, meaning they are obligated to put their clients’ interests first • Brokers and dealers (or registered representatives) are simply required to sell products that are "suitable" for their clients

Defining Fee Structures

In general, there are three types of fee structures that an advisor can build their business on:

Fee-Only

Fee-only advisors are exclusively compensated by the fees clients pay for services. A fee-only advisor may offer a range of services or fee types including investment management and advisory, flat fee ongoing financial planning, or one-time plans.

Fee-Based

Fee-based advisors are compensated by some combination of fees their clients pay for services and commission that comes from product sales. More often than not, these products are insurance-based investments that are sold by a larger broker-dealer that the fee-based advisor belongs to.

Commission

Finally, advisors who are compensated by commission only exclusively make a revenue based on the products they sell to their clients, and the commission they earn on those products. Of course, advisors who are only compensated by commissions rarely explain that. Instead, they may portray themselves  as being a financial advisor who doesn’t have any service fees paid by clients.

Differences In Compensation Structure

The truth is that most consumers can spot a commission-only advisor. They’ve heard that it’s important to work with an advisor who is compensated by their clients, but they may or may not be able to distinguish between fee-only and fee-based advisors.

Honestly, it makes sense that consumers would find this confusing! The terminology used by advisors when it comes to fees can feel vague, and fee-based advisors may even be trying to benefit from the fact that consumers are actively looking for fee-only advisors.

Luckily, consumers aren’t stuck guessing at whether or not an advisor is fee-only. There are a few ways that they can tell quickly and easily whether an advisor is fee-only or not.

  1. Check their Form ADV. By checking an advisor’s Form ADV, consumers can see how they’re compensated, the amount of assets their firm manages, other business activities they participate in, and whether or not there has been disciplinary action taken against the firm.
  2. Research. Do a little bit of digging! Most fee-only or fee-based advisors will loosely outline their fee structure on their website, and you may be able to ask for collateral that reviews fee schedules.
  3. Ask. When in doubt - ask. If an advisor can’t give a clear answer about how they’re compensated, or offers explanations for the products they sell, they’re likely not fee-only.

How Does Receiving Commission Impact Advice?

It’s important that every consumer understands how their advisor is compensated. When an advisor receives commissions from product sales, they’re motivated to sell those specific products - even if they’re not in their clients’ best interest.

Even if an advisor is fee-based and genuinely feels that they put their clients first, the conflict of interest that commision sales presents is still problematic. Commissions can motivate an advisor to advise a client against some financial decisions that would bring them peace of mind, such as diversifying their portfolio, or paying down debt, in favor of only selecting products they receive a commission from.

Understanding fee structures that financial advisors use, and how to determine whether an advisor is compensated for the sale of financial products to their clients, can help consumers make empowered decisions about hiring an advisor who has their best interests in mind. At the end of the day, fee-only advisors are the only financial advisors who can confidently say they advise clients without any conflicts of interest.

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