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Fee-Only Vs Fee-Based Planning: Understanding the Differences for Long-Term Success


Fee-Only Vs Fee-Based Planning: Understanding the Differences for Long-Term Success

Confused about the difference between Fee-Only and Fee-Based planning? You’re not alone. Financial planning jargon can be daunting when you’re just getting started.

Understanding the difference between Fee-Only and Fee-Based, however, is important and could be the key to your long-term planning success.

What is Fee-Only Financial Planning?

Fee-Only financial planners are legally registered as investment advisors and have a fiduciary responsibility to you to create a plan in your best interest. Fee-only advisors cannot accept any compensation as a result of product sales. In other words, they can’t make a commission from specific investments they recommend you purchase. They are paid directly by you – and only by you – either through an hourly fee, a retainer fee, or an agreed-upon percentage of your assets that they manage.

As a result, in most cases, Fee-Only advisors have fewer conflicts of interest. They are more focused on your needs, rather than on selling you specific investments, since their compensation is not determined by sales volume or choice. A Fee-Only advisor will not try to steer you toward commissioned annuities; a Fee-Only planner’s advice must be completely free of attachment to financial products. The role of Fee-Only advisors is to only provide you advice that fits your current financial situation and your goals and therefore not recommend products and services that don’t support that goal and that are not the best choices for you.

What is Fee-Based Planning?

“Fee-Based” is a category the brokerage community has created to take advantage of the success – and attractiveness – of Fee-Only advising. Because the terms sound so similar, it’s easy to think they are similar, but there is a major difference between Fee-Based planning and Fee-Only planning.

In Fee-Based planning, the advisor is compensated with a set percentage of your assets instead of a retainer or a flat hourly fee. In addition to that percentage, Fee-based advisors can also accept commissions from financial products, annuities, and insurance products they sell you. Each time you purchase one of those products, their earnings increase.

This leads to a fundamental conflict of interest. Your advisor wants to earn as much as possible while you want someone to provide honest and trustworthy guidance.

If one fund offers advisors a significant commission and another one doesn’t but is better for you and your financial goals, how likely is it that the advisor will forego the opportunity to earn the commission by recommending the better fund?

That is why the legally-binding Fiduciary Rule that Fee-Only Advisors follow is so important: the definition of a fiduciary relationship is one based on trust.

How to Make Sure Your Advisor is Fee-Only

Before selecting an advisor, ask how and what their compensation plan looks like. Ask them to disclose what their compensation fees are in writing and whether or not they accept commissions. By choosing an advisor who provides Fee-Only services, you stand a greater chance of avoiding any conflicts of interests. Remember, Fee-Based advisors are obligated by their brokers or by specific deals to sell certain products. Fee-Only advisors are under no such requirements and have a legal, fiduciary, obligation to work for you, and you only.

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