Fee-Only vs. Fee-Based Financial Advisor: What's the Difference?
If you’re looking for a financial planner, a financial advisor, or a wealth manager you may be confused about how their fees or cost structures work. When choosing a financial planner or adviser, it’s important to take into consideration how he or she is paid because different fee structures and external factors may influence the advice your planner gives you.
Two terms you are likely to come across are fee-only financial advisor and fee-based financial advisor. They sound similar, but the difference affects how your advisor is paid and whether commissions could influence the recommendations you receive.
How Are Fee-Only and Fee-Based Advisors Paid?
A fee-only financial planner is paid only by the client, whether through an hourly rate, a flat fee, a retainer, or a percentage of assets under management, and does not collect commissions on the products they recommend. A fee-based financial planner is paid the same way, but may also receive commissions on certain products they recommend.
What is a Fee-Only Financial Planner?
Fee-only financial planners are financial planners who receive payment for their advisory services only in the form of fees paid by their clients for their advice. They are not compensated through commissions. Fees may be paid on an hourly rate; on a percentage of the amount of assets under management (AUM); with a flat project fee; or through a monthly retainer. Whatever the fee model, all advisory compensation is paid by the client.
For a closer look at typical ranges and what drives them, see how much a fee-only advisor typically charges.
A fee-only financial advisor can also be a fiduciary, making him or her ethically bound to act in the best interests of his or her clients.
What is a Fee-Based Financial Planner?
A fee-based financial planner can also be a fiduciary, which commits them to make choices in their clients’ best interests. But, unlike fee-only planners, a fee-based financial adviser can receive commissions from some financial products. To maintain their fiduciary duty, the adviser must disclose to their clients any time they receive a commission to avoid any potential conflicts of interest and maintain fiduciary responsibility. A fee-based financial planning firm may have its own products, which they are incentivized to recommend. It is also possible the fee-based financial planning firm could be limited in its selection of investment products.
Comparing Fee-Only vs. Fee-Based Side by Side
| Item | Fee-Only | Fee-Based |
|---|---|---|
| Advisory Fee Structure | Paid by clients only | Paid by clients and commissions |
| Fiduciary Duty* | Yes | Yes |
| Products Used | Open architecture; can use any product | May have incentives to recommend specific products or own products |
| Who It May Suit | May suit clients who want every recommendation weighed the same way, regardless of product | May suit clients comfortable evaluating disclosed commissions on a case-by-case basis |
*Financial planners registered with the SEC are fiduciaries.
How Modera Is Paid
Modera is a fee-only firm. Our clients pay us directly for our advice, and we do not receive commissions on any product we recommend. The incentive described above, where an advisor could earn more by recommending one product over another, is not part of how we are compensated.
As a fiduciary, Modera is required to act in our clients’ best interests when providing advisory services. Our fees are disclosed in our Form ADV Part 2A, available on the SEC’s Investment Adviser Public Disclosure website, and an advisor can walk you through how they would apply to your situation.
Which is Right for You?
If you’re interested in finding financial guidance, understanding that this nuanced difference may be significant since fee-based allows for the possibility of a conflict of interest from commission compensation, whereas fee-only does not.
Here’s what the National Association of Personal Financial Advisors (NAPFA), the USA’s professional association of Fee-Only financial advisors, says about fee-only arrangements:
NAPFA’s position is that the Fee-Only method of compensation is the most transparent and objective method available. This model minimizes conflicts and ensures that your financial planner acts as a fiduciary.
Source: https://www.napfa.org/financial-planning/what-is-fee-only-advising
This does not mean fee-based planners would not operate in the best interests of their clients. However, it is important to know that the incentive to recommend certain financial products over others is present in a fee-based structure, but not with a fee-only financial planner. Other factors, such as geography, personal relationships, and overall costs may also influence your decision outside of fee-based and fee-only cost structures.
Questions to Ask a Prospective Advisor
Before signing on with any financial professional, ask:
- How are you compensated?
- Do you receive commissions or referral fees?
- Are you required to act as a fiduciary at all times, or only when providing certain services?
- Are there any other financial incentives that could affect your recommendations?
- Where can I review your fees and potential conflicts in writing?
About Modera Financial Planners:
We are proudly a fee-only, independently-owned firm that acts as a fiduciary for our clients. We have built our organization to put our customers’ interests first, as evidenced by our fee-only fee structure and fiduciary responsibility.
If you’re interested in working with our advisory team, please contact us. If you would like to learn more about financial planning, wealth management, and finding a financial advisor, please visit other areas of our education section.
Fee-Only vs. Fee-Based Financial Advisor FAQs
What’s the difference between fee-only and fee-based advisors?
A fee-only advisor is paid only by the client, through a fee such as an hourly rate, a flat fee, a retainer, or a percentage of assets under management. A fee-based advisor is paid the same way but may also receive commissions on certain products. That commission is the main difference between the two models.
Does fee-only mean lower cost?
Not necessarily. Fee-only speaks to how an advisor is paid, not to how much. Cost can vary by advisor and by the scope of services either way. The distinction that matters most is whether commissions can create an incentive to recommend one product over another.
Can a fee-based advisor still be a fiduciary?
Yes. Both fee-only and fee-based advisors can be fiduciaries. A fiduciary is required to act in the client’s best interest, and a fee-based advisor who receives a commission is required to disclose it to stay consistent with that duty.
What should I ask before choosing an advisor?
Start with how they’re compensated, whether they receive commissions or referral fees, whether their fiduciary duty applies at all times, and where you can review their fees and any conflicts in writing. See the full list of questions above.
Is Modera fee-only?
Yes. Modera is a fee-only, independently-owned firm that acts as a fiduciary for its clients.