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What’s the Difference Between “Fee-Based” and “Fee-Only?”

By JLP | October 31, 2006

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.

Topics: Basics, Financial Planning | 6 Comments »


6 Responses to “What’s the Difference Between “Fee-Based” and “Fee-Only?””

  1. Russell Bailyn Says:
    October 31st, 2006 at 4:48 pm

    Wow, I think we must think along the same lines. I wrote a post on a very similar topic at around 2:00. The only difference is that my post focuses on fee-only advisors and “the real” fee-only advisors. Getting paid based on AUM is a fancy way for planners to pat themselves on the back for being fee-based and continue earning a fortune. A true fee-based advisor will charge an hourly fee or a flat rate for creating a financial plan or investment policy statement. Then, the client can visit an e-trade type brokerage and buy the securities for $10 a pop.

  2. Denise Says:
    November 1st, 2006 at 8:52 am

    I can make myself crazy thinking about the role and structure of a financial advisor relationship and have on many occassions. I mean, if my AUM is sky high, that guy is not earning his keep, I’m sure. And how smart of a business guy can the “fee-only” person be if they aren’t taking full advantage of the income opportunities in their very own market/industry. And the product-sellers, well, we all know which fund they are going to lean toward.

    However, at the end of the day, though, I try to console myself by noting that it is not in the best interest of ANY financial advisor to lose money for you, right? If they did that, you’d pull all your business. So instead of making myself crazy, I just look at my bottom line and am happy if I’m gaining according to my goals.

    I know from experience, too, that moving from advisor to advisor creates more anxiety and potential loss through fees and such than a little lost to commission. This probably goes against much of the advice of PF, but for me, the price of sanity, in working with someone I like and trust and can communicate with, and avoiding the constant second-guessing is worth it to me.

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  4. Regret Says:
    November 3rd, 2006 at 10:14 pm

    Well, I don’t disagree with your point that there can be a big difference, but as a registered investment advisor (a fee-only business), I can say that we use the terms interchangeably. We’re probably not helping the fee-only planners out there, but the issue isn’t something about which we or our clients worry about too much.

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  6. gettingrichtogether.blogspot.com Says:
    November 10th, 2006 at 11:59 pm

    I think the best way to go is option 3)No financial advisor at all.

    For many of us, especially the younger ones, I would guess that we have nowhere near enough invested to warrant an advisor. Besides, with blogs like this one, there is plenty of advice out there to help you on your way. As a general rule: ETFs, ETFs, ETFs!

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