In the financial world, advisors and planners are compensated in one of two basic ways: by earning flat fees or by earning commissions. A fee-only financial advisor is paid a set rate for the services they provide rather than getting paid by commission on the products they sell or trade.
Should you be working with a fee-onlyfinancial advisor? There are many benefits to someone who is compensated solely by what they charge directly to clients and not from the commissions earned from the sale of financial products or financial transactions. However, there are drawbacks as well. Let's review.
Key Takeaways
- Many financial advisors are shifting to a fee-only compensation structure, where they receive a fee for their planning services in lieu of traditional commissions.
- The benefits of fee-only include transparency, no hidden charges, and no conflicts of interest to sell a certain product line or company offering.
- The downsides of fee-only advisors can include being more expensive or a limited scope of products and services offered.
- Fee-only advisors aren't always completely free of conflicts. If they're compensated by a portion of AUM, they may be biased against you withdrawing funds. However, they may bound by fiduciary standards to always put their client’s interest first and to fully disclose any potential conflict of interest to the client.
Fee-Only or Commission-Based?
The basic compensation models for financial advisors are as follows:
- Charging an hourly or a flat fee for the planning services they provide. Depending on the engagement, they may provide limited or comprehensive advice. Engagements may be one-time or ongoing.
- Charging a percentage based on assets under management (AUM)—say, 1% of the investment account value. The engagement may or may not include planning and/or other advice, which is usually secondary to money management.
- Earning commissions based on the sale of a product or a financial transaction, such as a stock trade. Advice or planning might be ancillary to the product sale (as with a stockbroker), or they might be a key part of services (as with a financial planner).
- Getting compensated through a combination of flat fees, percentage of AUM, or commissions. The exact mix varies by the advisor. Also known as "fee-based," this model allows advisors to offer clients a wider range of services as well as work with them to implement recommendations and monitor progress.
There has been some debate as to how "fee-only" compensation should be defined—mainly, whether or not it should include the second group, those who charge based on AUM. Generally, though, most agree, fee-only refers to payment from fixed, flat, hourly, or percentage-based fees.
Advantages of Using a Fee-Only Advisor
One of the major benefits of selecting a fee-only advisor is the freedom from the inherentconflict of interestthat can arise when a significant portion of the advisor’s income comes from selling financial products to you. The concern you should have as a potential client is whether or not the advisor is recommending a certain investment because it enhances theirbottom lineand if the products recommended are truly in your best interest.
In fact, there are some registered reps and others who earn all or part of their compensation via commission that may be required to favor products offered by their employer—which may or may not be the best investments for your portfolio strategy.
Since fee-only advisors do not sell commission-based products, receive referral fees, or collect other forms of compensation, the potential for conflicts of interest is limited. For this reason, many recommend that you only work with a fee-compensated advisor.
In addition, an advisor is usually afiduciary when they charge a fee for planning services and/or they are investing money for an advisory account; as a result, they are legally required to always act in the best interest of their clients, and to disclose anything that might smack of impropriety. Registered Investment Advisors (RIAs) and certified financial planners (CFP®s) both swear to act as fiduciaries, for example.
An advisor who only earns commissions—like a stockbroker—is held to a lower standard and does not have to make a "best-interest" recommendation, but rather one that is "suitable" for your needs.
Another benefit of using fee-only financial advisors is the opportunity for them to offer an objective second opinion of your situation. This is especially true if the advisor works with clients on an hourly, as-needed basis or perhaps will do afinancial planor financial review for a fixed project fee. Services here can range from addressing a specific financial question to a review of your investment portfolio or a full-blown financial plan.
Disadvantages of Using a Fee-Only Advisor
All of the above are great reasons to use fee-only advisors, but there are still some potential downsides to the fee-only model.
First, fee-only advisors might be more expensive. For example, let's say through the planning process, a fee-only advisor discovers a need and recommends that a client buys a commission-based product such as disability income insurance. If the fee-only advisor doesn’t sell the product, then the client would need to find and work with an insurance broker, adding additional steps to an already complex process.
Also, the insurance broker receives a commission from the sale of the product, so the client ends up paying both a fee and a commission (albeit to different people).
Some states limit an advisor's ability to charge a fee for the analysis of just insurance products or needs.
Consequently, the fee-only advisor has to either limit the services they offer or charge clients a higher fee. For wealthy individuals who are willing and able to pay a substantial retainer, a fee-only advisor could be the right choice. But, for many individuals with limited resources or whose assets are tied up in qualified plans, the out-of-pocket costs for a fee-only advisor could get prohibitive.
Fee-only advisors can be expensive in another sense. Investors with smaller portfolio balances or lower transaction activity may get favorable pricing with commission-based advisors. While fee-only advisors are relatively less expensive for clients with large portfolios, different fee structures impact investors differently.
Fee-only advisors are also in the unique position of holding fiduciary responsibility over your assets, yet they do not get incrementally rewarded for your success. Whether your portfolio doubles in size or gets cut in half, a fixed-fee advisor will likely receive the same fees to manage your portfolio. As there is minimal incentive to the advisor to ensure your investment success, you may find fixed-fee advisors may not always have your best interest at heart as well.
Another issue to consider is that being fee-only does not ensure that the advisor is competent or appropriate for you. While it conjures up the image of an erudite professional, like a lawyer or anaccountant, this compensation model doesn't guarantee the advisor has expertise—or that their expertise dovetails with your needs and profile.
For example, a fee-only advisor who specializes in working with teachers and government employees nearing retirement probably would not be the best advisor for a high-earning thirtysomething professional in theprivate sector.
Fee-Only Financial Advisors
Cons
Often more expensive/skewed to higher-income clients
More limited in product and service offerings
May not be totally disinterested (if you want to withdraw funds)
How to Find a Fee-Only Advisor
TheNational Association of Personal Financial Advisors(NAPFA) is one of the largest professional organizations of fee-only financial advisors in the country. It has afind an advisor link on its website. You can search by zip code and then further by area ofspecialization. Note that NAPFA members run the gamut from solo practitioners to large multi-advisor firms. Additionally, NAPFA members offer a wide range of service options, including hourly as-needed services, ongoing investment and portfolio advice, and almost everything in between.
TheGarrett Planning Networkis another organization of fee-onlyfinancial plannerswho mostly focus on providing hourly advice. There is a degree of overlap in the membership of the Garrett Planning Network and NAPFA. It also has a"find an advisor"function.
The accounting profession also has a financial planning designation for Certified Public Accountants (CPAs) called Personal Financial Specialists (PFS). Please note that while many holders of the PFS designation are fee-only, they are not required to be. As you contact advisors, you will need to ask these folks how they are compensated.
TheCertified Financial Planner Boardalso has a directory of financial advisors who hold theCFP® designation. Again, being a CFP® does not mean the advisor is fee-only. The CFP® Board recently has revised its compensation classifications to include fee-only, fee-and-commission, and commission. There has been some controversy surrounding its definition of fee-only, so investors using this database need to ask and be diligent in investigating advisors found here to ensure they are fee-only. The CFP® Board hosts a 'Find a Financial Planner' tool on their website.
What Does a Fee-Only Financial Advisor Cost?
A fee-only financial advisor's costs can range greatly, depending on their expertise and years of experience, their region, and the services they offer. A flat fee of $1,500 to $3,000 is typical for the original creation of a comprehensive financial plan, according to financial advisors. Timed or retainer rates can run between$150 to $400 an hour andbetween $1,000 to $7,500 annually.
What Does a Commission-Based Financial Advisor Cost?
A commission-based financial advisor doesn't cost you anything—directly, that is. They get compensated by commissions from the products they sell to you or sell for you.
Typical commissions for investment products and packages range from 3-6% of the sale.That sum comes out of the amount that actually gets invested, so in a sense, that commission "costs" you in terms of future returns.
Insurance product commissions, which are taken out of your first-year premium payments, range from 1% to 8% on annuities. On life insurance policies, an advisor may get 40% to 90% of the first year premium as a commission and between 2% to 5% commission from the second to the fourth year.
What's the Difference Between a Financial Planner and a Financial Advisor?
There's definitely overlap between the two. A financial planner is a professional who helps individuals identify and create a system/schedule to meet long-term financial and life goals. Some just advise, and others actually find investment products.
A financial advisor can apply to those who help you plan and also to those who manage the money in your portfolio and investment accounts. Financial advisors can include brokers and investment managers. "Financial advisor" is a broader, more generic term. All financial planners can be considered financial advisors, but not all financial advisors are financial planners.
How Do I Find a Fee-Only Financial Advisor?
Aside from asking around, you can zero in on a fee-only financial advisor by going to organizations that specialize in the same field. TheNational Association of Personal Financial Advisors(NAPFA) and TheGarrett Planning Networkboth have searchable directories on their websites.
Other, more general advisor organizations offer a good place to start. For example, the Financial Planning Association (FPA) has a database of financial planners that you can search according to location. On their website, you can easily filter the list to highlight fee-only planners—compensation is indicated in their profiles.
The Bottom Line
It is important to understand that the quality of the advice you receive is not solely tied to an advisor’s compensation model. However, the kind of advice you receive may be affected by the advisor’s compensation model. Compensation arising from sales commissions on financial products could cause advisors to recommend products mandated by their employer and/or products generating the highest commissions for the advisor. These products might not always be the best fit for your situation even if they meet the standard of suitability.
Critics of fee-only argue that this sort of arrangement tends to be more expensive. Of course, fees are an up-front expense—but make no mistake, the commissions paid to a financial advisor also come out of your pocket in the form of lower returns on your investment. Fee-only is not a perfect arrangement, but it is generally a bit more transparent and fees charged for advice are more visible. Commissions may be harder to ascertain.
Also, no advisor (or advisor group) can excel at everything. There are times when you may be better off working with an advisor who specializes in certain commission-based products such as a disability or health insurance. You may also want an advisor who is most current on all investment options. However, if you want advice on retirement planning and do not necessarily need to buy a specific product, an advisor who charges fees may be the right choice.
FAQs
Since fee-only advisors do not sell commission-based products, receive referral fees, or collect other forms of compensation, the potential for conflicts of interest is limited. For this reason, many recommend that you only work with a fee-compensated advisor.
Is a fee-only financial advisor better? ›
Since fee-only advisors do not sell commission-based products, receive referral fees, or collect other forms of compensation, the potential for conflicts of interest is limited. For this reason, many recommend that you only work with a fee-compensated advisor.
What do fee-only financial planners do? ›
Fee-Only planners are compensated directly by their clients for advice, plan implementation and for the ongoing management of assets. All NAPFA members are required to work only within the Fee-Only structure, accepting no commissions for their work.
Is a fee-only advisor a fiduciary? ›
Fee-only financial advisors act as a “fiduciary,” a term you may hear thrown around; it means they are obligated to put their clients' interests first. Ask if your financial planner is a registered investment advisor or a certified financial planner — both types are fiduciaries.
What is a fee-only financial firm? ›
A fee-only wealth management firm only receives compensation from their clients. Fee-only financial advisors are free from the potential conflicts of interest that other advisors may encounter if part of their pay is based on commissions or sales. A fee-only advisor is only paid by their client.
What are the disadvantages of having a financial advisor? ›
One perceived disadvantage of working with a financial advisor is the cost. In a study published in the Journal of Financial Economics, researchers found that the fees charged by financial advisors can significantly erode investment returns, especially for small investors.
What are the cons of a financial advisor? ›
Becoming a Financial Advisor
| Pros | Cons |
|---|
| Unlimited earning potential | You must develop a client base |
| Low start-up costs | Marketing costs vary widely |
| Lifetime learning | You will never learn everything |
| Huge range of products + strategies | Consider a somewhat narrow focus |
5 more rowsIs Edward Jones a Fiduciary? Edward Jones does not serve as a fiduciary except for at the Plan level of retirement plans. This means that their advisors aren't legally required to put their clients' needs ahead of their own.
What do fee-only planners sell? ›
Fee-only financial planners are advisors who operate on a fee-only basis to create budgets, plan retirement, pay down debt and set goals to reach other financial milestones. They typically collect fees from only you as a percentage of your assets under management (AUM).
Who is the best financial advisor company? ›
The Best Financial Advisors of 2022
- Best Overall: Fidelity Investments. ...
- Best for Mixing Robo-Advice with a Human Touch: Vanguard Personal Advisor Services. ...
- Best for Commission-Free Advisors: Zoe Financial. ...
- Best for Low-Cost Unlimited Access to Advisors: Betterment.
Fiduciaries are obliged to act in your best interest, whereas the title “financial advisor” implies no legal obligation. When looking for a financial advisor to help you develop your custom financial plan, you should ensure that your financial advisor is a fiduciary.
How do you tell if a financial advisor is a fiduciary? ›
A good starting point for determining whether someone is a fiduciary advisor is by looking them up through the SEC's adviser search tool. If their firm (and by extension they themselves) acts as a Registered Investment Adviser, they will have what is called a Form ADV Part 2A filing available to be viewed online.
What is the difference between fee-based and fee-only advisor? ›
Fee-only advisors only earn money through the fees their clients pay. The fee is often a percentage of assets under management (AUM). Sometimes, however, an advisor may charge a flat fee or an hourly rate. Fee-based advisors make money through client fees as well as from commissions or brokerage fees.
Are financial advisor fees negotiable? ›
Financial advisor fees may be negotiable. Whether you're able to get fees reduced can depend on which advisor or firm you're working with. If an advisor is willing to negotiate fees, they must specify that in their Form ADV.
How are fees paid to financial advisor? ›
Fee-only financial advisors do not accept commissions for products sold; instead, they charge by the hour, by the project, by assets under management, or some combination of these.
What is the difference between a financial planner and advisor? ›
The key difference between a financial planner and a financial advisor is that a financial planner focuses on you and your goals, whereas a financial advisor focuses on your money and your investments.
Why do so many financial advisors fail? ›
Lack Of Fulfillment
Unfortunately, most advisors are stuck in traditional financial planning and portfolio management firms that often don't align with their values or goals. They are required to spend their days selling products and services they don't believe in.
Why should I trust a financial advisor? ›
“A financial advisor can help you think through the ways you could put that money to work toward your personal and financial goals,” Lawrence says. You'll want to think about how much could go to paying down existing debt and how much you might consider investing to pursue a more secure future.
Why I quit being a financial advisor? ›
The most common reasons financial advisors quit are lack of fulfillment, difficulty finding clients, and burnout. Over 90% of financial advisors do not last three years, which means that there is a very low retention rate for financial advisors. To be a successful financial advisor, you need to be able to close a deal.
Do financial advisors charge too much? ›
But they don't offer their advice for free. While the typical annual financial advisor fee is thought to be 1%, according to a 2021 study by Advisory HQ, the average financial advisor fee is 0.59% to 1.18% per year. However, rates typically decrease the more money you invest with them.
An advisor who believes in having a long-term relationship with you—and not merely a series of commission-generating transactions—can be considered trustworthy. Ask for referrals and then run a background check on the advisors that you narrow down such as from FINRA's free BrokerCheck service.
What is the failure rate of financial advisors? ›
What Percentage of Financial Advisors are Successful? 80-90% of financial advisors fail and close their firm within the first three years of business. This means only 10-20% of financial advisors are ultimately successful.
Who is better Fidelity or Edward Jones? ›
According to J.D. Power, Edward Jones did particularly well in the investment adviser and investment performance factors while Fidelity did well with account information and account offerings.
What percentage does Edward Jones take? ›
The Program Fee is 1.35% and the Portfolio Strategy Fee begins at 0.19%. These fees are tiered so additional invested assets are subject to lower fees.
Which is better Fisher Investments or Edward Jones? ›
Edward Jones scored higher in 8 areas: Overall Rating, Culture & Values, Diversity & Inclusion, Work-life balance, Senior Management, CEO Approval, Recommend to a friend and Positive Business Outlook. Fisher Investments scored higher in 2 areas: Compensation & Benefits and Career Opportunities.
What is a normal fee for a financial planner? ›
Depending on the size of your investment, financial advisors typically charge a fixed-rate fee between $7,500 and $55,000, or 1.02% of assets under management (AUM) for ongoing portfolio management, according to a 2021 study by Advisory HQ.
Can fee-based financial planners make money through commissions? ›
The term 'fee-based' describes a kind of financial advisor who receives some or all of their income from fees paid to the advisor by the client. Many fee-based advisors not only receive pay from clients but also earn commission from brokerage firms, mutual fund companies, or insurance companies when they sell products.
Can fee only advisors sell annuities? ›
Retirement Planning
Fee-Based advisors can sell annuities and are paid handsomely to do so. A typical commission is 5-10% of the value you put in the annuity. Think about this from the insurance company's perspective.
Who are the top 5 fiduciary advisors? ›
Key Takeaways. BlackRock, Vanguard, Fidelity, State Street Global Advisors, and J.P. Morgan Asset Management are the five largest financial advisory firms in the United States, ranked by assets under management (AUM).
What percentage of millionaires have a financial advisor? ›
Seventy percent of millionaire households used some sort of financial adviser, and the average length of that relationship spanned 10 years, the survey found.
Certified financial planner
Financial advisors who are CFPs have met the rigorous training and experience requirements of the CFP Board, have passed the certification exam and are held to high ethical standards. CFPs have a fiduciary duty to their clients.
Is Charles Schwab a fiduciary? ›
Is Charles Schwab a fiduciary? Yes, at Charles Schwab, a financial advisor has the fiduciary duty to work in their clients' best interests at all times, putting them above their own interests and the interests of the firm.
When did Fidelity stop being a fiduciary? ›
In October 2014, Fidelity settled an earlier class action alleging breach of fiduciary duty.
Is Vanguard a fiduciary? ›
Learn more about our investment philosophy and company history. Personal Advisor is held to fiduciary standards under applicable regulations. (Meaning our advisors are required to act in your best interests at all times.) Also, our advisors don't receive commissions.
What are the top 10 fiduciary companies? ›
Find a Fiduciary Financial Advisor
| Rank | Financial Advisor | Assets Managed |
|---|
| 1 | CAPTRUST Find an Advisor Read Review | $714,587,898,072 |
| 2 | Fisher Investments Find an Advisor Read Review | $173,418,270,044 |
| 3 | GW&K Investment Management, LLC Find an Advisor Read Review | $46,803,858,104 |
8 more rowsMay 25, 2023
When we act as an investment adviser, we are considered to have a fiduciary relationship with you and are held to legal standards under applicable federal and state securities laws.
How do fiduciaries get paid? ›
How Do Fiduciaries Get Paid? In the personal investing business, a fiduciary adviser may collect fixed fees, commissions, or a percentage based on assets under management (AUM) for overseeing a client's portfolio.
Can advisor fees be charged monthly? ›
A registered investment advisor, or RIA, is compensated based upon their advice. They can only charge fees, and the most prevalent structure is the assets under management, or AUM, model. AUM fees are calculated as a percentage of the assets they manage and can be charged on a yearly, quarterly or monthly basis.
How do Edward Jones financial advisors get paid? ›
You pay a sales charge (sometimes referred to as a sales load) when you purchase a mutual fund, a fund in a 529 plan, a fixed income UIT or a variable annuity. Edward Jones pays your financial advisor a portion of these charges and payments.
What is the commission percentage for financial advisors? ›
This commission can range from 0.25% to 1% of the assets invested in the fund on an annual basis. The advisor may receive this fee as long as the investment remains in the mutual fund. Annuities: Annuity commissions are generally built into the price of the contract.
“The average investor pays from approximately 1.5% to 2% annually,” says Stuart Boxenbaum, CFP®, investment advisor and president of Statewide Financial Group. “So the math is pretty simple.
How often do financial advisors charge fees? ›
Most financial advisors charge based on how much money they manage for you. That fee can range from 0.25% to 1% per year. Some financial advisors charge a flat hourly or annual fee instead.
What can a financial advisor do for me? ›
An advisor can create a detailed financial plan, which involves: assessing your current situation. determining your present and future goals and needs. giving advice on the financial products that are right for you.
What is a fiduciary advisor? ›
A fiduciary advisor is a financial professional who is legally and ethically bound to act in the interests of their clients. Fiduciary advisors must prioritize the needs of their clients above their own needs.
What are the pros and cons of having a financial advisor? ›
- Pro: time. Hiring an advisor can save you a significant amount of time spent on research and studying different investment strategies. ...
- Pro: strategy. ...
- Pro: peace of mind. ...
- Con: peace of mind. ...
- Con: conflict of interest. ...
- Con: costs and fees.
Financial advisors who serve individuals and families make up the majority of financial advisors, and they fall into three categories: investment advisors, Certified Financial Planner (CFP) professionals, and Registered Representatives (RRs), previously known as stock brokers.
Do I really need a financial advisor? ›
If you have enough money in your bank account to start investing, you might want to find an advisor. Another sign you need an advisor is if you're navigating a significant life change. For instance, if you've recently become a parent, finding a financial advisor can help you plan for your child's future.
What is the difference between fee based and fee only planners? ›
The main difference between fee-only advisors and fee-based advisors is that fee-only advisors earn no additional compensation beyond the fee that is paid to them by clients, whereas fee-based advisors may earn commissions on the sale of certain products.
Is it really necessary to have a financial advisor? ›
Here's what it comes down to: If you have money to invest, financial goals to pursue, but no definitive plan, it may be time to retain an advisor. The right one can reduce financial stress, streamline your decision-making, and guide you to a wealthier future.
What are the pros and cons of using a financial advisor? ›
- Pro: time. Hiring an advisor can save you a significant amount of time spent on research and studying different investment strategies. ...
- Pro: strategy. ...
- Pro: peace of mind. ...
- Con: peace of mind. ...
- Con: conflict of interest. ...
- Con: costs and fees.
Many fee-based advisors not only receive pay from clients but also earn commission from brokerage firms, mutual fund companies, or insurance companies when they sell products. Fee-only advisors are a subsect of fee-based advisors who do not earn commission, so they are exclusively paid by clients.
What fees do you want to avoid? ›
Here are 14 fees you shouldn't pay — and some easy ways to avoid them.
- ATM fees. ...
- Foreign transaction fees. ...
- Check-your-credit report/score fees. ...
- Dealer prep fees. ...
- Mutual fund sales load fees. ...
- Card payment fees. ...
- Late fees. ...
- Credit card cash advance fees.
Depending on the net worth advisor you choose, you generally should consider hiring an advisor when you have between $50,000 - $1,000,000, but most prefer to start working with clients when they have between $100,000 - $500,000 in liquid assets.
What is the average return from a financial advisor? ›
Investors who work with an advisor are generally more confident about reaching their goals. Industry studies estimate that professional financial advice can add between 1.5% and 4% to portfolio returns over the long term, depending on the time period and how returns are calculated.
How safe is your money with a financial advisor? ›
Bottom Line. Yes, an unscrupulous financial advisor can steal from you, so it's important to take the time to hire a fiduciary advisor you can trust. Advisors who are registered with the SEC must act in your best interests and follow the custody rule, a set of regulations designed to safeguard your assets.
How can you trust a financial advisor? ›
An advisor who believes in having a long-term relationship with you—and not merely a series of commission-generating transactions—can be considered trustworthy. Ask for referrals and then run a background check on the advisors that you narrow down such as from FINRA's free BrokerCheck service.
