Fee Only vs Fee Based Financial Advisor
The short answer to the question, is there a difference between a Fee Only vs Fee Based Financial Advisor, is YES! Fee only financial advisors work for their clients solely on the fee that is charged. This fee could be a percentage of assets managed, hourly rate, or flat fee.
Never is a Fee-Only advisor going to make money based on the sale of a financial product. That would be considered a commission because its based on the sale. Many advisors still sell financial products and make a commission for the sale on that product. If that’s the only way they make money, they would be referred to as a commission-based advisor.
Fee-Based Financial Advisor
A Fee-Based financial advisor charges a fee just like a Fee-Only financial advisor, but they also make commission on sales from commission-based investment products. Avoid both Fee-Based and Commission-Based advisors. This is because there’s the natural conflict of interest if they make money from selling you a product.
So, if you’re looking for great questions to ask a prospective financial advisor that you’re interviewing or your current advisor, finding out what fee camp they fall in is extremely important. A Fee-Only advisor is the only type of advisor that can truly say they act a Fiduciary for their clients. This means they put the client’s best interest ahead of their own and anyone else’s.
Commission Based Financial Advisor
There is an obvious conflict of interest that a Commission Based Financial Advisor or Fee-Based Financial Advisor has if they’re potentially going to make a commission for the sale of a financial product. For any type of commission-based product being sold, there is a better investment strategy that a fee only advisor could implement in its place.
Advisors can earn commissions on the following:
- Executing trades for buy or sell orders for a client.
Think of the movie Wolf of Wall Street as an example.
- Insurance products such as Annuities or types of Life Insurance.
These are really insurance agents not financial advisors. These agents can shine up a turd like an annuity and make it sound like the best investment with no risk.
- Selling Mutual Funds
Often mutual fund companies pay a commission when an advisor sells their A Share funds. These can charge up to 5.5% for a 1x fee to get into these funds vs the much cheaper options available.
- Structured Products, which come with all type of bells and whistles.
These are the shiny toys Broker/Dealers are attracting clients into these days to keep the commission engine going at firms.
For all of these above, there are better options. A Fee-Only Financial Advisor can fill the need a client is looking for vs using any of the above.
Is there a difference between Fee Only and Fee Based Financial Advisors?
It’s hard to tell how a financial advisor’s fees are truly structured. And, in the case of the fee-based advisor, they may even tout themselves as a Fiduciary. The easiest way to find out if they’re a fee-based advisor and to call them on their BS is to see if they work through a Broker/Dealer. This info can be easily found in the disclosure section of their website. There is typically a link at the bottom of the page to disclosures. If you see the words “Broker/Dealer,” I would find someone else to manage your money.
Even if that advisor says they act as a Fee-Only Advisor, they have a conflict of interest with the firm they work for because Broker/Dealers are created to sell financial products. A Fee-Only advisor is going to work with what’s called a Registered Investment Advisory firm or RIA for short. Often a Fee-based advisor can work for both a Broker/Dealer and a RIA. They still have that conflict of interest being an employee of the Broker/Dealer and should be avoided.
Finding a Financial Advisor
In summary, when you’re looking for a financial advisor, look for a Fee-Only Financial Advisor so you know they truly work as a Fiduciary. This means they will have your best interest in mind with every recommendation and trade they make for you. If they are Fee-Based or Commission Based, keep moving because they’re not the best you can find.