Financial planners help their clients create a customized plan for managing their money, though they aren’t all alike. In terms of cost, there’s a significant difference between hiring a fee-based financial advisor and a fee-only financial advisor.
A fee-based financial planner earns money through commissions while fee-only financial advisors earn money based solely on the services they provide. Both types of financial planners can help with things like saving for retirement, debt management, investing, and asset allocation. But it’s important to understand how and what you may pay for their expertise and advice.
Here’s a closer look at how working with a fee-based vs. fee-only financial advisor compares.
What Is a Fee-Based Financial Advisor?
Fee-based financial planners can charge fees directly to their clients but they can also be paid through commissions. Those commissions are generated when a fee-based financial advisor sells a financial or investment product.
For example, a fee-based financial planner may charge you an hourly fee to consult with you on your investments, but may also get paid a commission for selling you a life insurance policy, annuity or mutual fund.
The commission they receive may depend on which product you buy. For example, they may get paid 50% commission if you buy a life insurance policy from company A, but only a 30% commission if you buy a life insurance policy from company B.
When discussing fee-based financial planners, you may hear other terms like fee-and-commission or fee-offset. These are different ways to describe similar payment structures.
Fee-and-commission means an advisor may charge you a small fee while also receiving commissions from product sales. Advisors who use a fee-offset model may charge you a fee, then offset it by the commissions they earn on the products you purchase. Whether you’re hiring a fee-based, fee-and-commission or fee-offset financial advisor, their earnings primarily hinge on what they sell to you.
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What Is a Fee-Only Financial Planner?
Fee-only financial advisors only get paid based on the services they provide, hence their name. Their income isn’t drawn primarily from commissions they earn on products.
A fee-only financial planner can use different types of fee structures when working with clients. For example, you may pay any of the following ways when working with a fee-only financial advisor:
• Annual fee
• Hourly fees
• Package fees
• Percentage of assets under management
In terms of what is the typical fee-only financial advisor fee, it can depend on the fee structure and the range of services provided. The average fee for advisors that charge based on a percentage of assets under management is around 1%. So for every $100,000 you have invested, $1,000 would go toward fees.
What’s important to know about working with a fee-only financial advisor is that commissions don’t drive their earnings. At the end of the day, what they earn is based on what they’re doing to help you achieve your financial goals.
Fee-Based vs. Fee-Only Financial Advisors: Which Is Better?
When weighing whether it makes more sense for you to work with a fee-based financial advisor or fee-only advisor, cost is an important factor. After all, the more you pay in advisory fees, the less you get to keep out of your investment returns.
But that isn’t the only consideration to keep in mind. It’s also important to weigh the value and quality of the financial advice you’re receiving. Specifically, you should understand what fee-based and fee-only advisors are or are not obligated to do for you.
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Suitability Rule for Fee-Based Financial Planners
Fee-based financial planners and fee-only investment advisors are held to different standards when it comes to the ethical guidelines they’re required to follow. A fee-based financial advisor is held to a suitability standard, which means they’re only obligated to recommend investment products that are suitable for your situation.
This leaves the door open for fee-based advisors to recommend products that can yield the highest commission, as long as they’re deemed “suitable”. That doesn’t necessarily mean a fee-based advisor will sell you a subpar product. But it does mean that fees can play a part in what they choose to recommend.
Fee-Only Advisors and Fiduciary Duty
Fee-only investment advisors have what is called a fiduciary duty to their clients. This duty makes advisors legally obligated to act in the client’s best interest at all times. This means that fee-only financial planners cannot sell you a specific product just because they will get a commission from the company.
In fact, the National Association of Personal Financial Advisors (NAPFA), the professional association for fee-only financial planners, actually requires that members take an oath swearing that they do not “receive a fee or other compensation from another party based on the referral of a client or the client’s business.”
Fiduciary advisors are also required to disclose potential conflicts of interest and/or past disciplinary actions. When you’re working with a fee-only financial planner, you have the reassurance of knowing that their services and practices must follow these guidelines.
Is a Fee-Based or Fee-Only Advisor Right for You?
The downside of working with a fee-only financial planner is, of course, the fee.
Fees can be cost-prohibitive for many would-be investors who are anxious to enter the market but unsure how to get started. Some fee-only financial planners require that you invest a large amount before they will even take you on as a client, which can be another potential barrier to entry.
This means that fee-only financial planners are not always accessible to diverse types of investors, and instead focus on investors putting large amounts of money into the market every year. In that scenario, a fee-based financial advisor may be the more attractive option.
But the trade-off is forgoing the fiduciary standard for the less stringent suitability standard. So you have to decide what you’re more comfortable with when it comes to both fees and the ethical standards an advisor is held to.
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What About Automated Advisors?
If you don’t have a lot of money to start investing and you’re looking for a way to keep fees as low as possible, you may consider an automated advisor in lieu of a human advisor.
Automated or robo advisors help investors build and rebalance their investment portfolios using a specific algorithm. This algorithm can take into account things like your age, risk tolerance and overall financial goals to help determine the optimal portfolio makeup for your situation.
When it comes to fees, robo advisors can be more affordable than hiring a fee-based or fee-only financial advisor. Depending on the advisory platform, you may pay no fee at all up to a certain amount of assets, say $10,000 or less. Once you reach a minimum threshold, you may pay anywhere from 0.25% to 0.50% per year, based on your account balance.
Compared to what you may pay for a fee-only advisor or even a fee-based advisor, that can seem like a bargain. But there’s one important thing to remember: automating your investments using an algorithm means you don’t get the benefit of personalized advice the way you would with a human advisor.
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Fee-based and fee-only financial planners can help you further your investment goals. And robo-advisors can help you build a portfolio on autopilot. But there is another way to get where you want to go financially.
You could try a platform like SoFi Invest® online trading, which offers investment technology paired with the comfort that comes with having a human right there by your side to help. It’s easy to create a customized investment plan that fits your needs while having access to financial planners when you need it.
SoFi’s financial planners are credentialed, and when you work with a SoFi financial planner, you know they will always have your best interests in mind. Perhaps most importantly, SoFi Invest has zero management fees and it’s easy to get started investing today.
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