Have you ever had someone try to explain the difference between fee-based and fee-only financial advisors? In general, fee-based and fee-only represent the two main compensation models, with some advisors choosing a hybrid approach.
At Midwest Capital Advisors, we feel it is important to know the differences between the two models so you can be well-educated before seeking help from an advisor.
Fee-Only
A fee-only financial advisor is paid directly by the client. The advisor’s fee is generally calculated as a percentage of the assets under management, typically 1% of the client’s portfolio value each year, but that can vary. Compensation may also be a fixed, flat, or hourly rate. Fee-only advisors do not receive commissions on financial products they recommend to clients or from fund providers.
The main benefit of a fee-only model is increased transparency. The fees you pay for your advisor’s services are more visible and easier to understand. Your advisor is less likely to have a conflict of interest or be incentivized to sell you certain products.
Fee-only financial advisors act as a “fiduciary,” meaning they are obligated to put their client’s interests first. Both Investment Advisor Representatives and CERTIFIED FINANCIAL PLANNER™ Professionals are types of fiduciaries. Nothing will guarantee your fee-only advisor is completely free from conflicts of interest.
Fee-only advisors prosper as they grow their client’s account value and that could benefit the client as they have an incentive to help the client do well. It is important to build a relationship of trust that your advisor is acting as a fiduciary with your best interest at heart.
Fee-Based
A fee-based financial advisor is paid directly by the client but can also be paid from other sources, such as commissions from products they sell. If your financial planner or advisor is a Registered Representative associated with a Broker/Dealer, they may not be held to a fiduciary standard but instead held to the lower legal standard of suitability. The suitability standard means they have to do what is suitable for you but not necessarily what is in your best interest.
Earning a commission on certain products may create a conflict of interest if a large part of the advisor’s income comes from selling financial products to you. The advisor may be incentivized to steer you toward specific products to earn a commission, not because they are the best option for you.
Unless you establish a relationship based on trust, you may not be completely sure if an advisor recommends a certain product or investment because it’s in your best interest or because it helps their bottom line. Some fee-based advisors are required to favor products offered by their employer, which may or may not align with your best interests.
Why Does it Matter?
The quality of advice does not depend on your advisor’s compensation model. Knowing the pros and cons of fee-based and fee-only will help you select an advisor you are comfortable with and one you can trust to help make financial decisions that will help you reach your goals.
Start Planning for Your Success
Midwest Capital Advisors is a fee-only investment advisory firm. For us, a fee-only model aligns more closely with our values and enables us to serve our clients with their best interests in mind.
We will work alongside you to assess your current financial state and listen to your goals for your family, your employees, or for your future. We will map out specific recommendations to help meet those goals, implement your plan, and monitor it. Let us know if we can help you plan for a more confident financial future or if you have questions about our services.