- Fee-based counselors provide financial planning advice to individuals and couples for a fixed price based on the services they provide to you.
- Paid advisors do not receive any commission on the sale of products.
- Fee-based and fee-based advisors have several differences to consider when deciding which type of advisor to work with.
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Finding a professional to help you manage your money is an important step in reaching your financial goals. But not all financial advisers are the same; some may offer different services and, more importantly, they may have different pricing structures.
A paid financial advisor will be the one you come across during your search. Here’s what you need to know.
What is a fee-only financial advisor?
A fee-only financial advisor is an advisor who is paid a fixed rate based on the services they provide to a client, rather than being paid based on a commission. These types of counselors act as a
, which means that they are required to make recommendations that are in the best interest of the client. While this seems like common sense, many other advisors only act on the basis of suitability, which means they only need to provide recommendations tailored to a client’s situation.
Paid advisors offer the following services:
- Listening and advising on a client’s financial situation
- Implement the client’s plan
- Manage client assets on an ongoing basis
What is the difference between fee-only and fee-based fee?
There are a few differences between fee-based and fee-based advisors. Fee-only advisors do not receive commissions on the sale of products, such as those from the sale of life or disability insurance, mutual funds or annuities. They charge clients a fee for their expertise and advice, and the opportunity to work together.
Paid advisors can be paid in several ways, including:
- Hourly rate: Advisors are paid by the hour for the service rendered.
- Flat rate fees: Clients pay an ongoing fee to continue the advisor-client relationship.
- Percentage of Assets Under Management (AUM): Advisors take a certain percentage, such as 1%, of all assets a client has under their management.
- Fixed Fee: Some advisors choose to charge a fixed fee, typically paid monthly, semi-annually, or annually.
Fee-based advisors can be paid in several ways, including:
- Commission-based model: Paid advisers can earn fees on the sale of insurance and investment products.
- A combination of a commission and fee model: Paid advisors can charge fees on the sale of products as well as fees for giving advice to the client.
- Through a Percentage Based on Assets Under Management (AUM): Like fee advisers, fee advisers can also charge a fee based on the amount of assets they manage for a client.
- Through an hourly or fee model: Like fee advisers, fee advisers can also charge hourly or standing fees for their advice.
There are often downsides to working with paid advisors, primarily because they can still earn a commission on product sales. “One [drawback] to work with a fee advisor is that there is an inherent conflict of interest, ”explains Scott Turner, CFP and fee advisor at Rockstar Financial Planning. “You can’t tell if they offer the best products, or if they are only limited to selling their own exclusive / limited products offered by the company they work for or represent.”
Pros and Cons of Paid Financial Advisors
Paid financial advisers have several advantages and disadvantages:
Advantages of fees only:
- Less Conflict of Interest: Since fee advisers do not accept payment on the sale of investment or insurance products, they can make recommendations without being tempted to receive payment for such recommendations.
- Follow a fiduciary standard: Because there are fewer conflicts of interest, fee advisers make recommendations that are in the best interests of the client, requiring them to meet a fiduciary standard.
- The client knows the fees in advance: Fee-based advisors discuss in advance how they are paid with their clients, either by an hourly rate, an ongoing fee, a fixed fee, or a percentage of assets under management .
Disadvantages of fees only:
- Work with more expensive: For those who need some basic savings or budgeting advice, or want to buy an investment or insurance product and are not afraid of paying a fee, it may be less expensive to work with another kind of advisor.
- Products will have to be found elsewhere: “Paid advisors usually don’t sell insurance, so they refer clients to a third-party insurance broker or seller. A paid advisor can often sell insurance directly to clients (although this may not be the best policy for the client), ”says Matthew Jenkins, CFP and President of Noble Hill Planning, a fee-based financial planning firm.
The financial report
Working with a fee-only financial advisor can be a great way for clients to obtain fiduciary financial advice that is in their best interests. However, not all clients will be able to afford the fees for working with an advisor or will be able to justify the fees they may charge to manage the client’s assets. While working with a paid advisor is also an option, potential clients should understand the fees they charge and how they are paid in order to determine if it is right for them.
“Working with a fee-based advisor minimizes conflicts of interest, but just because someone is a fee-only advisor doesn’t mean they have the particular expertise you’re looking for,” says Brandon Renfro, CFP and owner of Belonging Wealth Management. “You should always see a paid advisor to make sure they have the right education and training to help you. “