In the world of financial advising, choosing the right professional can be the most important financial decision you make. Most clients want authentic, unbiased advice served up with their best interests in mind.
Fee-only advisors are often preferred by clients seeking objective advice. In the financial advisory landscape, you will primarily encounter two main types: fee-only planners and fee-based financial planners, each with distinct approaches to compensation and client service.
Many investors seek out a fee-based advisor, thinking it means the same thing as fee-only, only to discover hidden fees or commissions that can create incentives that may influence their recommendations. When choosing between fee-only and fee-based advisors, it’s essential to understand their fee structures to avoid conflicts of interest and make a more informed choice.
With as many as 4,300 financial advisors operating in the Scottsdale, AZ, area (over 300,000 nationwide), clients can make an informed decision about the type of advisory relationship they want only if they clearly understand how different advisors are compensated.
To speak with an ARQ advisor who will have your best interests in mind, contact us today.
In this article, we’ll break down the definitions, differences, pros and cons, and help you decide which might be best for your needs.
What Is a Fee-Only Financial Advisor?
A fee-only financial advisor is compensated solely through fees directly paid by the client. They do not receive commissions, referral fees, or any other type of compensation from third parties, such as investment firms, insurance providers, or broker-dealers. Therefore, they are only accountable to their clients.
This model is championed by organizations like the National Association of Personal Financial Advisors (NAPFA), whose members must adhere strictly to fee-only compensation. As defined by NAPFA and widely accepted in the industry, many of these advisors are professionals who act as a fiduciary—legally and ethically obligated to always put your interests first.
Fee-only compensation can take several forms:
- Percentage of assets under management (AUM): Typically, 0.5% to 1.5% annually, common in fee-only wealth management.
- Hourly rates: Often $200–$400 per hour for specific advice.
- Flat or project-based fees: For comprehensive financial plans, ranging from $1,000 to $10,000+, depending on complexity.
- Retainer fees: Monthly or annual subscriptions for ongoing advice.
Because their income comes solely from clients, fee-only advisors aren’t incentivized to sell high-commission products, such as annuities or loaded mutual funds.
Fee-only financial planners often emphasize comprehensive planning, including retirement strategies, tax strategies, estate planning, and investment management. Firms that specialize in fee-only wealth management serve high-net-worth individuals by offering customized portfolio oversight without the pressure to sell specific products.
What Is a Fee-Based Financial Advisor?
A fee-based financial advisor charges a fee for their services—similar to fee-only—but can also earn commissions from selling financial products.
Fee-based advisors operate under a compensation structure that can create incentives to sell products and recommend specific products that generate additional profit for the advisor. This hybrid model is common among advisors who are dually registered as investment advisors and broker-dealers.
For example, a fee-based advisor might charge an AUM fee for managing investments while earning commissions on insurance products, annuities, or certain mutual funds they recommend. These commissions often come from product providers, which could incentivize advisors to recommend specific products that pay higher commissions.
This distinction is why fee-based vs fee-only debates often center on trust and transparency. Fee-based advisors can offer broader services, such as direct access to insurance products, but clients must scrutinize disclosures for potential conflicts of interest.
Key Differences: Fee-Only vs. Fee-Based
The core difference in fee-only vs fee-based boils down to compensation sources and fiduciary responsibility:
Compensation
Fee-only: The advisor is 100% compensated directly by the client through a transparent fee structure, which means they answer only to the client and must fully disclose how the fee is applied and how all parties to a transaction are compensated.
Fee-based: Fee-based advisors have a fee structure that includes client fees, as well as commissions from their firm and third-party product providers.
Fiduciary Duty
Fee-only: Many fee-only advisors are RIAs or CFP® professionals and therefore held to a fiduciary standard.
Fee-based: May act as a fiduciary only for fee-based services, but is only held to the suitability standard when recommending commission-based products.*
Conflicts of Interest
Fee-only: Fiduciaries are required to disclose all conflicts of interest and to always act in the best interest of their clients. If there are conflicts, they must disclose, manage, and mitigate them to the extent possible.
Fee-based: Advisors are paid commissions to sell investment and insurance products, which is inherently a conflict of interest.
Transparency
Fee-only: Fiduciary advisors are legally required to fully disclose all fees and expenses to their clients, as well as any potential conflicts of interest. The fees in this model are paid directly by clients, ensuring clarity and transparency.
Fee-based: Disclosure rules differ by registration and product type; non-fee-only advisors may have different disclosure standards and potential conflicts—check their regulatory filings.
Services
Fee-only: Offers comprehensive planning and investment advice; may refer out for insurance.
Fee-based: One-stop shop, including direct sales of insurance or annuities.
In fee-only financial advisor practices, advice is product-agnostic. This objective method is considered the most transparent and unbiased approach to financial advice, minimizing conflicts of interest and upholding high ethical standards.
In contrast, a fee-based financial advisor might seamlessly integrate product recommendations into their advice, which can be convenient but risky if commissions sway decisions.
Pros and Cons of Fee-Only Advisors
Pros:
- Unbiased Advice: No incentive to push high-commission products, allowing them to align fully with your goals.
- Fiduciary Standard: Legally bound to act in your best interest and always put the client’s interest first.
- Transparency: Fee-only planners have clear, transparent pricing and will outline their fees before you begin working with them, so you know what to expect without hidden fees.
- Long-Term Focus: Fee-only planners help clients with investment strategies that align with their goals, and their success is tied to growing your wealth (especially with AUM fees).
- Ideal for fee-only wealth management, where objective portfolio construction is key.
Cons:
- Higher Upfront Costs: Fees can seem expensive for smaller accounts or one-time advice.
- Limited Product Access: May not sell insurance directly, requiring referrals to separate providers.
- Minimums: Many require significant assets for ongoing services (ARQ Wealth offers our Wealth Builder service to young professionals just getting started).
Pros and Cons of Fee-Based Advisors
Pros:
- Comprehensive Services: Easier access to insurance, annuities, and other investment products in-house.
- Direct Access to Investment Products: Fee-based advisors can provide clients with a range of investment products, including insurance and annuities, which may be suitable for certain planning needs.
- Potentially Lower Initial Fees: Commissions can offset some advisory costs.
- Flexibility: Suited for clients needing both planning and product implementation.
- May accept Lower Minimum Assets: Suited for clients without significant assets.
Cons:
- Conflicts of Interest: Fee-based advisors may be incentivized to recommend or sell products that generate higher profits for themselves, creating conflicts of interest.
- Lower Standard in Some Cases: Product recommendations only need to be suitable, not necessarily in the client’s best interest, and fee-based advisors do not always act as fiduciaries.
- Hidden Costs: Commissions reduce returns indirectly.
- Less Transparency: Harder to calculate total compensation.
Why the Difference Matters
The difference between fee-only and fee-based isn’t just about semantics; it impacts the quality of advice. Studies and expert opinions (from sources such as NAPFA and the CFP Board) indicate that fee-only models may reduce certain conflicts of interest, leading to better client outcomes (although no outcomes are guaranteed). For example, recommending a low-cost index fund instead of a high-fee actively managed fund is simpler without the concern of commission loss.
In fee-based vs. fee-only scenarios, fee-based might suit simple needs involving insurance, but for pure investment or planning advice, fee-only often provides greater objectivity.
In practice, a fee-only advisor is someone focused solely on your success, not on sales quotas.
Clients with complex needs, such as comprehensive wealth management, should prioritize fee-only advisors. For clients with less complex needs who need specific products like insurance or annuities, a transparent fee-based advisor might work—but demand full disclosures.
How to Know if an Advisor is Fee-Based or Fee-Only
You can discern if an advisor is fee-based or fee-only by asking the right questions:
- Are you a fiduciary 100% of the time? Do you have that in writing?
- How exactly are you compensated?
- Do you earn commissions on any recommendations?
- What are all potential costs (direct and indirect)?
It’s also important to assess how well the advisor communicates and how comfortable you feel working with them.
Check Disclosure Forms
RIAs must file Form CRS and ADV with the SEC and provide Parts 2A/2B to clients. They also must make their disclosure brochure easily accessible on their website. Form ADV includes disclosures of how and by whom they get compensated, along with any potential conflicts of interest. You can also check an advisor’s CRS and ADV filing directly at the SEC’s Investor.gov website.
All RIAs are required by SEC Regulation Best Interest (Reg BI) to file a Customer Relationship Summary (CRS), a brief (typically 2-page) document that summarizes their services, fees and costs, conflicts of interest, standard of conduct, and disciplinary history. The form must be delivered to retail clients before or at the time of a recommendation, account opening, or when certain changes are made.
Bottom Line
Understanding the difference between fee-only and fee-based advisors is key to trusting your financial guidance. Fee-only advisors, including financial planners and fee-only wealth managers, offer objectivity and fiduciary guidance. While fee-based advisors offer convenience, their commission potential may pose risks many investors prefer to avoid.
Ultimately, the best choice depends on your needs. But choosing fee-only financial advisors can provide peace of mind that their advice truly serves you—not hidden incentives. Interview multiple professionals, review disclosures, and choose alignment with your goals for long-term financial peace of mind.We invite you to explore the difference at ARQ Wealth, where all of our advisors are fee-only fiduciaries, offering pure, unbiased advice for all your planning needs. You can contact us today to talk about your financial goals and how we can help.