3 Ways Fee-Only Advisors Differ from Fee-Based
You’ve decided you would like to work with a financial advisor, but now you’re not sure which type of financial advisor is right for you. A simple Google search reveals that there are different types of financial advisors and knowing which one will be the best fit is not immediately clear.
The first, and perhaps the most important step to take for narrowing down your choices is to understand the difference between fee-based and fee-only financial advisors.
There are three distinct ways that fee-only financial advisors differ from fee-based financial advisors and we’re going to explore those differences right now.
Only Paid in Fees
Fee-only advisors charge for their services by using either an hourly rate, an annual percentage of managed assets, or a fixed fee for specific services. They do not have any built-in conflicts since they get paid no matter what products you end up buying (e.g. mutual funds, insurance etc).
Also, because they are not limited to earning an income from the products they represent, they are more likely to offer a wider range of options to their clients.
For that reason, fee-only advisors are known for having a better handle on your financial picture, and doling out more objective advice. Since they cover a much broader range of financial products, they have to know more about them, too. Therefore, the advice they give out is generally considered to be more comprehensive.
Don’t Sell Anything, Ever
Pay attention closely, because the wording here is tricky. To the casual observer, “fee-only” and “fee-based” might mean the same thing. But you should know that they each represent a different method of compensation for financial advisors.
To understand how fee-based advisors are compensated, you must first understand how commission-based advisors get paid. These professionals are paid only when they sell certain financial products.
This can be confusing for consumers, who may not understand that the products recommended to them might come from a biased perspective.
No Commissions, No Conflict
Back to fee-based compensation methods. The fee-based financial advisor is a hybrid of fee-only and commission compensation styles. They may charge fees and receive commissions. You should be extra cautious with advisors who work this way, and ask a lot of questions since you need to ensure that they are truly acting in your best interest.
They usually hold a license for selling insurance or other investments, for which they receive a commission when they make sales. That can create a potential for conflict of interest between your best interests and your advisor’s.
If you go with a fee-based advisor, make sure you ask lots of questions, such as Why are you recommending this product to me? After all, it’s your money and your future that’s at stake here!
Based in the far Northern California city of Redding, Woven Capital specializes in helping small business owners, entrepreneurs and physicians navigate their biggest financial hurdles to make smarter decisions with their money.
Aaron and I became friends through NAPFA and I asked him to write some thoughts on “3 Ways Fee-Only Advisors Differ from Fee-Based” as a guest topic for this site.