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Commission-based: All compensation comes from commissions on the products they sell. Fees and commissions (also known as fee-based): Advisors are compensated partly by fees from clients and partly from commissions. Fee-only: Advisors are only compensated by clients and do not receive any product-specific commissions.
A fee-only advisor is the only one of these three that receives compensation that is not tied to the products they sell. For this reason, it is widely seen as the model that most readily adheres to the fiduciary standard.
Alternate name: No-commission financial advisor
The Fiduciary Standard
Fee-only advisors, or fee-only financial planners, almost always operate as fiduciaries. This means they are legally bound to give advice that is in their client’s best interest. Some might assume all financial advisors have a requirement to give advice that is in their client’s best interest, but that’s not always the case. A majority of the financial advice industry operates on a “suitability standard.” Suitability means a recommendation must be appropriate based on your financial status and goals, but if one product pays the advisor more than another, and both are suitable, the advisor can recommend the product that pays them a higher commission, even if it might not be the best choice for you out of the two options. In 2017, the Department of Labor issued a new Fiduciary Rule to apply a fiduciary standard to almost all financial advisors who give advice on retirement accounts. This new fiduciary rule, however, still would not apply to advice provided on investments held outside of retirement accounts. After several court battles, the rule has been in limbo since 2018, and a new proposed version will be reviewed in 2020.
How Fee-Only Financial Advisors Work
When you think about where someone’s paycheck comes from, that can give you a hint as to where they’ll place their loyalty. A fee-only financial advisor cannot receive compensation from a brokerage firm, a mutual fund company, an insurance company, or any other source besides you, the client. They represent you and your interests when giving you advice. A fee-only advisor may charge you a rate that’s based on a percentage of the assets they manage for you and take it out of your account each quarter, or they might charge a flat annual fee or an hourly rate. Make sure you understand how an advisor’s fee structure works before you start a relationship with them.
Fee-Only Financial Advisors vs. Fee-Based
A fee-based financial advisor can receive fees paid by you and commissions paid to them by a brokerage firm, mutual fund company, insurance company, or investment partnership. The advisor should disclose these fees to you. Many advisors who use the term “fee-based” recommend something called a managed account. Be aware that the investments offered inside this managed account may pay incentives to the company the advisor works for, which means it may not be as objective as it appears. Even though both fee-only and fee-based financial advisors may manage accounts where they charge fees as a percentage of the assets, the investments they place inside these accounts can be quite different. Fee-only financial advisors have a fiduciary responsibility to choose investments that are in your best interest. They typically use investments that have low internal expenses, such as no-load mutual funds, stocks, bonds, and other investments that have no annual 12(b)1 (marketing or distribution) fees.
Locating a Fee-Only Advisor
Many fee-only advisors belong to an association called NAPFA, the National Association of Personal Financial Advisors. Individuals may only join NAPFA if they work as fee-only financial advisors. NAPFA offers a search feature on its website to help you locate a fee-only advisor near you.
