Is There Any Real Difference In Fee-Only or Fee-Based Financial Planners?

“Fee-only advisors derive no compensation from selling commission-based products; any compensation they receive comes from clients. That compensation structure helps ensure that the advisor is working strictly on the client’s behalf and isn’t inclined to favor products that may not be in the client’s best interest,” according to Esther Pak, of Morningstar, in a post on Yahoo Finance.

Pak goes on to explain that “fee-based advisors use a compensation structure that’s a hybrid of what commission-based planners and fee-only advisors employ. They accept compensation from clients as well as commissions from third parties, such as mutual funds or insurance companies, every time they sell their products. Therein lies the potential conflict of interest. While you may pay a fee-based planner less outright compensation than what you’d pay for a fee-only advisor, fee-based advisors can earn commissions by putting you in certain products, and the commissions they earn on some investments may be higher than others. Thus, the advisor may have a financial incentive to favor one product over another.”

She points out that “most fee-based planners work under a suitability standard rather than a fiduciary duty. Whereas advisors who have a fiduciary duty should be able to demonstrate they’ve chosen the best products for their clients, advisors operating under the suitability standard should make recommendations that are suitable (though maybe not the best) for their clients based their time horizons and risk tolerance.”

You can read the entire article here.

Learn more about our Fee-Only Financial Planning services

Related Reading:

Bob Verees Article on Meaning of Fee-Only Financial Planning

What Value Does a Fee-Only Investment Advisor Add?

Financial Planning Fees You See and Those You Don’t

New York Times on Fiduciary Financial Advisors

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5 Responses to Is There Any Real Difference In Fee-Only or Fee-Based Financial Planners?

  1. Shags January 19, 2011 at 8:28 am #

    My feeling is that Fee-Only or Fee-Based still charges the client based on how much the client is worth to them. If one client invests $1,000,000 and another invests $2,000,000, the fee can be nearly twice as high in difference, though the time and energy involved in crafting a plan and portfolio may not be twice as much.

    I still feel the most fair way to charge is based on an hourly-rate, with the client being charged based on how much the advisor is worth to the client, and not the other way around.

  2. Rick Kahler January 19, 2011 at 8:33 am #

    Shags, That can be true. And, it’s also my experience that often the higher the net worth a person has, the more complex their planning can get. So, generally speaking, I find that complexity usually increases with net worth. This is not always the case, but I find it generally true.

  3. MLM January 19, 2011 at 9:38 am #

    For Rick and Shags…typically, fee-only advisers have a tiered fee schedule. I.E., the $2mil investor is at .75% vs a $1mil investor is at .90%.
    For Rick: nice explanation of the difference between the fee-based and fee-only

  4. jerry and carol January 19, 2011 at 12:54 pm #

    I responded to Mr. Bunk on the Morningstar article…Jerry


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