Some advisors will tell you that “fee-based” and “fee-only” financial planning is the same thing. They are wrong. They are very different. Here’s how:
A “fee-only” financial planner is one who gets paid SOLELY by the client. There are NO commissions whatsoever. The client pays for the planner’s services either by the hour or by the plan. Some fee-only planners also manage assets, charging a percentage of “assets-under-management.” This percentage varies, but is usually no higher than 1% per year. Of course there are always exceptions to the rule. Regardless, there are NO commissions on products sold because the fee-only planner does not sell products. If a product is needed to complete a plan, the fee-only planner either refers the client to a salesperson or directs the client to a no-load or low-cost alternative.
NOTE: Some people have said that fee-only financial planners who charge fees based on assets under management (AUM) also represent a conflict-of-interest because they get paid MORE when the clients invest more with them. So, if a client comes to a planner for advice on whether to take some of their assets to pay off their house (assets that would remain in AUM if they weren’t used to pay off the house), would the planner act in the best interest of the client? It’s an interesting question.
Now, contrast that with a “fee-based” advisor. A “fee-based” advisor can charge fees under management but can also receive commissions on product sales. This should show you just how lucrative product sales can be. Granted, some fee-based advisors do something called a fee-offset, where they charge the client either a commission or a fee, but not both at the same time. From the client’s perspective, I don’t see how this is superior to the old commission-based model.
As I have said in the past, it isn’t fair to say that all fee-only planners are good and all fee-based or commission-based advisors are bad. There are excellent commissioned-based advisors out there. The problem is the built-in conflicts-of-interest that exist in the commission-based way of doing business. I have seen PLENTY of examples of advisors doing the wrong thing to make me a believer in the “fee-only” model.