If you’re looking for a wealth management firm, you may have encountered different terms describing the way the firm is compensated. Two common ones are fee-only and fee-based. While they sound similar, they do not have identical meanings. Here’s the difference between the two.

A fee-only wealth management firm is a firm that receives payment for their advisory services only in the form of fees paid by their clients for their advice. In contrast, a fee-based firm is paid by clients for advisory services but may also receive commissions for recommending certain financial products. Both fee-only and fee-based wealth managers are often considered fiduciaries, but there are important differences between the two.

Wealth Management vs. Financial Planning vs. Financial Advisers

Another confusing part in the search for financial guidance is discovering there may be different ways in which those who provide financial services are described. In general, the titles – wealth manager, financial planner, and financial adviser – are often used interchangeably and may describe the same general set of services and specialization. However, there may be differences in services offered, even among providers with the same designation. Therefore, you should ask specifically about the services a prospective planner does and does not offer.

What is a Fee-Only Wealth Management Firm?

A fee-only wealth management firm is a firm compensated for advisory services only through fees paid by clients. It is not compensated through commissions paid for selling certain financial products. In a fee-only model, advisory fees may be paid either on an hourly rate, according to the amount of assets under management (AUM), as a flat project fee, or with a monthly/annual retainer.  However, all compensation is paid exclusively by the client. A fee-only financial planner is not incentivized to make decisions regarding investment product recommendations that may conflict with the best interests of their clients.

Fee-only wealth management firms operate under an open architecture, meaning they are not bound to a set of financial products and are able to consider a variety of financial products in the market. This facilitates objectivity because the firm has more options and freedom over what they can recommend to their clients. A fee-only wealth manager is also typically a fiduciary, which means they are ethically bound to act in the best interests of their clients.

What is a Fee-Based Wealth Management Firm?

A fee-based wealth management firm is also typically a fiduciary, committing its employees to operate in their clients’ best interests. However, unlike fee-only models, a fee-based firm may also receive commissions from some financial products. To maintain its fiduciary duty, the firm must disclose any commissions received as well as any potential conflicts of interest. A fee-based wealth management firm may have its own products, which it is incentivized to recommend. A fee-based firm may also receive a referral fee or finder’s fee when involving other professionals.   For example, a fee-only firm could not receive a referral incentive for recommending an accountant to help a client with their tax return.

Fee-Only vs. Fee-Based Wealth Management Firms

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

*Financial planners registered with the SEC are fiduciaries.

Which Fee Structure is Right for You?

For those seeking financial guidance, understanding fee-only vs. fee-based is an important consideration.

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 firms will not operate in the best interests of their clients. However, the incentive to recommend certain financial products over others is present in a fee-based structure, but not with a fee-only firm. Other factors, such as geography, personal relationships, and overall costs may also influence your decision outside of fee-based and fee-only cost structure.

 

Ask the Right Questions

When you are considering wealth management firms, you should understand that they often don’t advertise their fee structure except in their Form ADV. This is the document used by investment advisers to register with the SEC or state securities’ authorities. The form consists of two parts, both of which are available to the public on the SEC’s Investment Adviser Public Disclosure (IAPD) website. When searching for financial counsel, be sure to ask about the fee structure, taking specific note of fee-only vs fee-based.

About Modera Financial Planners

We are proudly a fee-only, independently-owned financial planning 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 our services, please contact us. If you would like to learn more about financial planning, wealth management, and finding a financial adviser, please visit other areas of our education section.