Fee-Only vs. Fee-Based Financial Planner: Which Is Best?

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Updated on Monday, February 4, 2019

Deciding to use a financial advisor or planner is a big step in your investment journey. While many investments are easy to manage on your own, not everyone has simple accounts. Having a professional give you personalized advice can help you when you aren’t sure what to do.
But not all advisors are created equal. Financial advisors come in many different forms with various certifications and qualifications. There isn’t too much oversight on who can call themselves a financial professional, which means choosing the wrong one might cost you.

It’s important to know how financial advisors and planners earn their salary. Knowing the difference between fee-only and fee-based is a big step in choosing the right financial planner for you.

financial advisor

Fee-only financial planners vs. fee-based planners

The biggest difference between fee-only and fee-based advisors is how they’re paid. Fee-only advisors are only paid by their clients and no one else. Fee-based planners are paid by clients and other sources, including a commission from companies if they sell their products.

Fee-only financial plannerFee-based financial planner
Is only paid by the client.Is paid through a variety of sources, including commission from companies if they sell products to their clients.
Gives financial advice based on the client’s needs and desires.May encounter conflicts of interest if they can earn money from other companies.
Acts as a fiduciary and required to put the interest of the client first.Usually not a fiduciary.

Both types of planners can recommend specific stocks, mutual funds or other investments. Both can help you create and maximize your financial plan. Both are available to discuss how you can optimize your long-term growth. But the type of advice you get from fee-based advisors might be different from fee-only advisors due to how they get paid.

What are fee-only financial planners?

A fee-only financial advisor or planner earns money from you, the client. They don’t earn commission and thus have fewer conflicts of interest; they aren’t likely to offer you products you don’t need, since they don’t earn commission from third-parties.

These types of financial planners typically act as fiduciaries. This means they are required to act in your best interest and don’t earn money from the services and products they recommend.

When considering a financial planner, ask if they are a fiduciary. Having someone on your side is a big deal when dealing with your money.

What are fee-based financial planners?

Fee-based financial planners make some of their money from you but may also earn commission from other companies.

Say your financial planner tells you to buy a particular stock or fund that they earn a commission from — that is a fee-based planner. They may recommend something that might not be the best for you but could earn them extra cash. Because they aren’t required to put your interest and needs first, they often aren’t a fiduciary.

How to find a financial planner

While anyone can use the title of a “financial planner,” it’s important to find the legitimate ones. Here are a few things to consider when vetting your future financial planner.

1. Check their licensing. Visit BrokerCheck to see if a firm is licensed. If they are registered to sell securities and offer advice, they should be registered through FINRA’s BrokerCheck.

2. Ask about Form ADV. Advisers must register with the U.S. Securities and Exchange Commission (SEC) to verify their practices. An ADV — or Adviser Public Disclosure — tells you what a company offers, the advice they provide and if there are any conflicts of interest. They might also include fees they charge and collect. You can look up an ADV form or ask a prospective financial planner for it.

3. Check court orders. See if advisors have any legal action against them through the SEC Action Lookup.

4. Verify locals. FINRA offers portals to each state’s securities regulator. You can look up to see if a local advisor or planner is licensed. If you were referred to someone through a family member, friend or colleague, you could check to see if they are who they claim to be.

5. Ask. If you’re worried about how a planner or firm makes their money, ask them. Inquire if they are a fiduciary, request they disclose any companies that pay them commissions and ask if they’ve had any legal trouble.

Which financial planner is right for you?

While getting a fee-based financial planner isn’t wrong, it might not be the right choice, either. Fee-only advisors are required to act in your best interest, while fee-based planners may not always act with only your interests in mind. Costs among planners vary widely, even when broken down by fee-only and fee-based.

Consider vetting potential financial planners as much as you can before agreeing to use one. The difference could cost you a lot of your hard-earned money in the long run.

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