Fee-Only Financial Planner: What’s The Difference?

piggy bank between two stacks of cash

 

People often ask, “what is a fee-only financial planner?” There are three main ways in which a financial planner gets paid; fee-only, fee-based and commission. So what exactly is the difference?

What is a fee-only financial planner?

A fee-only financial planner charges either a percentage of assets under management (AUM) and/or flat or hourly rates to clients and does not accept commission compensation based on product sales. Often, a fee-only financial planner is a registered investment advisor (RIA) or a certified financial planner (CFP) with a fiduciary responsibility to act in their clients’ best interest.

Acting as a fiduciary means there are fewer conflicts of interest when creating or tailoring financial plans. Additionally, fee-only financial planners provide more comprehensive advice to clients.  A fee-only financial advisor only receives compensation directly from the client vs. receiving commissions from products they sell.

What is a fiduciary?

A fiduciary legally must give advice that is in their clients’ best interest. Most people would think it’s a standard for financial advisors to always act in their clients’ best interest, but unfortunately, that isn’t so in all cases. There is what’s called a “suitability standard” which means an advisor’s recommendation must be appropriate based on the client’s financial goals. A good question to ask an advisor you’re considering to hire is if they have a fiduciary responsibility or a suitability standard to you.

In June 2017, a new federal rule came about that makes it more difficult for a financial advisor to take advantage of you. This new rule is called the Fiduciary Rule.

What is the fiduciary rule?

The fiduciary rule states, “…anyone who handles retirement assets and gives advice—this includes financial professionals of all types, whether they call themselves brokers, financial advisors, financial planners, or wealth managers—must adhere to a new “impartial conduct standards.” These new standards include:

  • Advisors to charge reasonable rates
  • Prohibiting advisors to mislead clients about products they recommend (i.e. ETFs, Mutual Funds, Annuities, etc.)
  • A push for fees to be more transparent to clients

What is a fee-based financial advisor?

A fee-based financial planner may charge AUM fees, flat or hourly rates, and earn commissions for product sales.  While this description sounds better than commission, it can be deceptive because it may include all three types of compensation.  It’s a good idea to clarify which compensation method the advisor is being paid under before proceeding with any recommendations.

What is a commission-based financial advisor?

Commission-based financial advisors receive payment or commission for the sale of a financial product to a client. A commission-based advisor’s income is earned based on the products he or she sells or the types of accounts that are opened.

Commission-based advisors only are required to adhere to the suitability rule toward their clients. This means commission-based advisors do not place a duty to their clients first; rather their primary duty is to their employing brokers or dealers. Moreover, they do not have to disclose any conflicts of interest.

Fee-only vs commission-based

In a nutshell, it is important to understand how an advisor will be paid before entering into an advisory engagement.  Laurel Tree Advisors chooses to provide a fee-only fiduciary relationship for our clients because we prefer to be transparent in the way in which we are compensated for the services we provide our clients.

Have questions about which type of financial planner is right for you? Let us know in the comments below or contact us today.