Fee-Based vs. Fee-Only Financial Advisors, Explained

How do you stack up fee-based vs. fee-only financial advisors to see which type of financial advisor makes the most sense for your finances?

While fee-only advisors only make money from client fees, fee-based advisors can earn commissions on top of client fees. It’s easy to mistake one for the other, so we’re here to explain the differences to help you feel confident working with either type of advisor.

What is a fee-only financial advisor?

Fee-only financial advisors only earn compensation from client fees for services like investment management, financial planning or other advice. They don’t earn commissions from buying or selling securities, insurance or other financial products and have a fiduciary responsibility to their clients. And for that reason, these advisors are considered the gold standard in the industry.

Fee-only financial advisors can earn money from:

Assets under management (AUM) fees. These are fees for managing your investments, expressed as a percentage of the assets you invest with the advisor.

Fixed fees. Many advisors offer services like financial planning for fixed (or flat) fees.

Hourly fees. If you need an adjustment to your financial plan or other one-time services, your advisor may simply charge an hourly rate.

In your advisory firm search, you may encounter those that claim to be fee-only but also sell insurance.  Fee-only status means advisors and firms earn no money whatsoever from commissions. Therefore, no — an advisor can’t be fee-only if they also sell insurance products.

Traditional, brick-and-mortar registered investment advisor (RIA) firms aren’t the only fee-only financial advisors on the market. Most robo-advisors — digital platforms that automatically select and manage your investments — also limit fees to assets under management (AUM) fees. Hybrid advisors, which combine digital asset management with access to a human advisor, also generally operate on a fee-only basis.

What is a fee-based financial advisor?

Like peanuts, driveways and MTV, the term “fee-based” is a bit of a misnomer. A more accurate descriptor for fee-based financial advisors is likely “fees-plus.”

While fee-based financial advisors earn money from the same fees as fee-only advisors, they can also earn money from roles and relationships outside their duties as financial advisors.

For example, fee-based advisors could earn money through the sales of:

Insurance. Advisors who are also licensed insurance agents may earn commissions when you purchase annuities, life insurance and other products. They may also charge ongoing management fees for products like annuities and whole and variable life insurance policies.

Investment products. Some advisors are also registered broker-dealer representatives and may earn commissions or other compensation when you purchase specific securities, including mutual funds, stocks and bonds.

Meanwhile, some fee-based financial advisory firms also charge performance-based fees, which kick in when an investment or portfolio outperforms an established benchmark.

So why does it matter if your advisor earns commissions or performance-based fees? Three words: conflicts of interest.

Fee-based advisors and conflicts of interest

A conflict of interest occurs when you and your advisor have different goals. For example, when working with a fee-based advisor, some potential conflicts of interest include:

• Commissions. When your advisor is licensed to sell insurance, they may only recommend products that pay them a commission despite more affordable or favorable policies offered by other insurers.
• Performance-based fees. These fees could incentivize your advisor to take greater risks with your money so they can earn a higher fee.

The bottom line on conflicts of interest? Commissions and performance-based fees can lead an unethical fee-based advisor to put their compensation ahead of your needs. However, many RIA firms have ethical codes of conduct that strive to mitigate these conflicts so you can make the most informed financial decision.

Fee-based vs. fee-only financial advisors: Which is better?

When comparing fee-based vs. fee-only financial advisors, there’s no hard and fast rule that says one’s better than the other. However, there are situations where one might make more sense than the other.

A fee-only financial advisor might be a better fit if you:

• Want to avoid conflicts of interest. Fee-only advisors have few conflicts of interest to disclose since they don’t sell investment or insurance products.
• Seek the highest level of transparency. The National Association of Personal Financial Advisors (NAPFA) requires its 4,000 members to work on a fee-only basis, calling it the “most transparent and objective method available.”
• Can afford potentially higher minimums. You may find that fee-only advisors have higher investment minimums or fees than their fee-based counterparts.

A fee-based financial advisor might be a better fit if you:

• Are a new investor. Fee-based advisors may charge less than their fee-only counterparts or have lower investment minimums, making them potentially more appropriate for emerging investors.
• Need insurance or other financial services. Having a fee-based advisor may make it easier to buy insurance, annuities and other investments from a single source.
• Find an advisor you trust. Sometimes it’s best to go with the advisor you connect with and trust the most, even if they earn commissions or charge performance-based fees.

When considering any advisor, be sure to:

• Do your research. Read about potential conflicts of interest in a firm’s Form ADV Part 2 Brochure.
• Get clarity on their compensation. Always ask prospective advisors questions about how they’re compensated and ensure their responses align with the firm’s fees outlined in its Part 2 Brochure.
• Understand their dual roles. Be clear about the role in which your advisor is making a recommendation — as a fiduciary or a salesperson.

Ultimately, the best advisor will be the one you trust to manage your money and goals with equal care.