Fee-Based vs. Fee-Only: Why This Distinction Matters
Are you working with a fee-only or fee-based advisor?
Fee-only advisors are paid solely by you, while fee-based advisors may also earn commissions from selling products, creating potential conflicts of interest.
If you’re working with a financial advisor or considering hiring one, here’s a simple but critical question to ask:
Are they fee-only or fee-based?
It might sound like a small difference. It’s not.
In fact, it’s one of the most important things to understand about how your advisor is compensated, and whether they have any incentives that could influence the advice you receive.
Why It Matters
Imagine this: You’re paying your advisor 1% of your assets each year to manage your portfolio. That’s clear and transparent. But what if they’re also recommending investments like annuities or mutual funds that pay them a commission when you buy in?
Now, instead of being compensated solely by you, they’re also getting paid by the investment product provider. That creates a potential conflict of interest, even if they’re doing their best to act in your favor.
And while these commissions should be disclosed, they’re not always easy to spot. They might be buried in fund documents or explained in language that doesn’t make the compensation structure obvious.
That’s why it’s important to do your due diligence and understand how your advisor gets paid, and more importantly, who is paying them.
So, What’s the Difference?
Let’s break it down:
Fee-Only Advisors
Are paid directly and only by their clients
Do not accept commissions or compensation from product providers
Are typically structured to reduce conflicts of interest
Often act as fiduciaries, meaning they are legally obligated to act in your best interest at all times
If you’re the one paying them, you’re the one they work for.
Fee-Based Advisors
May charge a fee like a percentage of assets under management or a flat financial planning fee
May also receive commissions from selling investment or insurance products
Might wear two hats. They may act as a fiduciary when giving advice, but not when selling products
This doesn’t mean they’re doing anything wrong, but it does mean there is the potential for misaligned incentives. And that’s something worth understanding clearly.
How to Find Out
When interviewing or working with a financial advisor, ask:
Do you receive commissions or any third-party compensation for the products you recommend?
Are you fee-only?
Do you act as a fiduciary at all times?
You can also check their Form ADV Part 2A or Form CRS, which they are required to provide. These documents disclose how they are compensated, any potential conflicts of interest, and what services they provide.
The Bottom Line
If your advisor is getting paid by someone other than you, it’s worth pausing to understand how that might influence their recommendations. Fee-only advisors are not the only trustworthy professionals out there, but they do offer a level of simplicity and transparency that many people prefer.
Financial advice can be complex. How your advisor is paid shouldn’t be.