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Fee-Based Financial Planner: It Might Not Mean What You Think

By Justin Pritchard, CFP®

When you’re looking for a fee-based financial planner, you’re probably looking for unbiased help with minimal conflicts of interest. However, the words you use are critical because there’s a big difference between a “fee-only” financial planner and a “fee-based” financial advisor. 

That might seem like splitting hairs until you understand the rules for each type of advisor. What’s more, some financial planners don’t have to follow any rules, so they can call themselves anything they want—even when it’s misleading or the opposite of what you expect.

Key takeaway: Fee-based financial planners can earn commissions and other sales-based compensation. Fee-only advisors cannot earn commissions, but that only applies when advisors use the strictest definition. 

What to watch out for: Many advisors call themselves “fee-only,” but they get commissions and other third-party payments, making the term confusing. For example, a Wall Street Journal investigation showed that up to 11% of advisors inaccurately called themselves fee-only on the CFP® Board’s website. Those advisors were either misleading the public or displaying an alarming level of ignorance.

Fee-Only vs. Fee-Based Financial Planners

The differences between these two models come down to how advisors earn money and their fiduciary status.

Fee-Only Financial Planners (assuming the strict definition)

  • Do not earn commissions
  • Are fiduciaries with all clients at all times, legally bound to act in clients’ best interests
  • Cannot receive any sales-related compensation, including third-party payments, bonuses, or other economic value

A fee-only financial planner provides financial advice, investment management, and other services for a fee. Those fees must come directly from clients and not from any third party. Plus, clients need to know about those fees and see them transparently. So, fee-only advisors typically send an invoice to clients showing exactly how much they pay, how often they pay, and where the money comes from.

Fee-only planners can charge fees in several ways, such as:

  • Flat fees paid quarterly or monthly
  • One-time costs for financial planning projects
  • Hourly charges
  • A percentage of assets under management (AUM)
  • A percentage of net worth and/or income
  • Fees based on complexity or other measures

Again, this assumes that the person calling themselves fee-only is using the right terminology—more on that below.

Diagram of how fee-only advisors are different from fee-based financial advisors (compensation models)

What Is Fee-Based Financial Planning?

  • Can earn commissions or charge fees
  • Not a fiduciary with all clients, or at all times
  • May get third-party payments or compensation that clients are unaware of
  • May benefit from revenue-sharing or other arrangements that indirectly benefit the advisor at the expense of the firm’s clients
  • Commissions may come from placing trades, mutual fund sponsors, insurance companies, REITs, and others

Fee-based means that an advisor can charge either fees or commissions. In some cases, they’ll charge clients an “advisory” fee based on assets under management or a flat-fee method. In other cases, they can sell products and earn a commission. Ultimately, the advisor gets to choose what type of relationship they have with a client, and sometimes advisors have both advisory and commission-based relationships with a client (but that should not happen in the same account—otherwise the advisor is double-dipping).

Even if an advisor does not earn a commission from working with a particular client, the advisor is still a fee-based advisor. Fee-based advisors are not necessarily dishonest or bad people—they simply have the ability to receive commissions and other economic benefits that might be surprising to clients. When these advisors are fully transparent, and they truthfully explain everything to clients, they are doing good work.

Who Decides What Each Term Means?

There is no formal, government-regulated definition of fee-only or fee-based. That’s why this is so confusing.

Several industry groups require that their members meet certain criteria to use the term “fee-only,” but not all financial advisors belong to those groups. And as noted above, even their members misuse the term.

CFP® Board definition (for CFP® certificants only): According to the Board, the term applies only when “(a) the CFP® professional and the CFP® professional’s Firm receives no Sales-Related Compensation; and (b) Related Parties receive no Sales-Related Compensation in connection with any Professional Services the CFP® professional or the CFP® Professional’s Firm provide to Clients.”

NAPFA definition (applies to NAPFA members only): NAPFA takes a similar view. “NAPFA defines a Fee-Only financial advisor as one who is compensated solely by the client with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product. Neither Members nor Affiliates may receive commissions, rebates, awards, finder’s fees, bonuses or other forms of compensation from others as a result of a client’s implementation of the individual’s planning recommendations.”

Advisors who are not CFP® certificants or NAPFA members: If an advisor is not required to follow the definitions above, they can call themselves whatever they want. Unfortunately, most people believe the term fee-only always meets the standards above. But there are rarely consequences for somebody using that term in the “unexpected” way.

Average Cost for Fee-Based Financial Planning

Once again, it’s worth determining if you’re talking about a fee-only or a fee-based financial planner. 

Fee-only, without commissions:

  • When managing investments for a fee, fee-only financial planners tend to charge 1% on the first $1 million, with the cost decreasing after that.
  • There may be additional underlying investment expenses.
  • Hourly rates typically range from $150 to $400 per hour, with the average around $233 per hour (and rising).
  • A retirement plan might cost anywhere from several hundred dollars to $3,500 or more, depending on complexity.
  • Flat fees, retainers, or “subscriptions” (paid quarterly, monthly, or annually), are all over the board and depend on services provided. You might pay $2,000 on the low end or more than $10,000 per year.

Fee-based, assuming commissions:

  • Typical mutual fund commissions start as high as 5.75% of the amount you invest, although that number should decrease as dollar amounts increase. Additionally, advisors might receive subsequent annual payments of 0.25% per year or more.
  • Annuity commissions can range from 1% to 10% or more, depending on the product you use. Near the high end, that means when you invest $100,000, the salesperson gets $10,000 up front.

Again, fee-based advisors are not necessarily bad people. But you need to be careful when somebody tells you there are no fees or that you don’t pay anything—because somebody is paying them, and ultimately, it’s you.

In the interest of full disclosure, you should know that I am a fee-only financial planner using the definition from the CFP® Board and NAPFA. As a result, the information you see here may be biased in favor of the stricter version of what makes a fee-based financial planner vs. a fee-only planner. The most important thing is that you work with somebody who genuinely wants to help you, who discloses exactly what you’re paying (and how), and who is honest about any conflicts of interest that exist. If that’s not what you’re getting right now, learn about changing financial advisors.

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