Although “fee-based” and “fee-only” financial planners sound similar, they both have different fee structures and different obligations to investors. Here’s what you need to know about fee-based vs fee-only financial planners.
You might think that a financial planner is just someone who helps you decide how to save and spend your money, but their roles and duties can go far beyond that. A financial planner is a certified professional who helps you develop a plan to accomplish your financial goals. Different types of financial planners can specialize in retirement, debt management, risk management, investing and asset allocation.
Whether you’re saving for retirement, a second home, or early retirement, a financial planner can help you figure out a path to reach your goals. As useful as financial planners can be, however, there is some confusion about two different types of financial planners with very similar names: fee-based financial planners and fee-only financial planners.
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Fee-Based Financial Planners
Fee-based financial planners are paid by clients, but they are also paid via other sources, such as receiving commission from financial products that are sold. That means that a fee-based financial planner may make money based on the specific financial products they sell you, similar to other commission-based salespeople, like car salespeople.
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 for a life insurance policy or mutual fund that they sell you.
This mix of compensation creates an inherent conflict of interest because the commission they receive might be different depending on the product you purchase. (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.)
Fee-Only Financial Planners
Fee-only financial planners are financial planners who are paid directly by the client. A fee-only planner may have different types of fee structures, ranging from flat rates, hourly costs or a percentage of the total assets managed, but they do not collect commissions or other sources of compensation from fund providers.
Unlike fee-based financial planners, fee-only investment advisors have what is called a fiduciary duty to their clients, which means that they are legally obligated to act in the client’s best interest.
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.”
This means that when you work with a fee-only financial planner, they are required to act in your best interest when they recommend financial products. 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.
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.
Some investment companies are ditching the people altogether and instead relying on complex algorithms that invest on your behalf in the form of automated advisors.
These algorithms invest and rebalance your investment portfolio based on goals you input into the algorithm. One major benefit of automated advisors is that they tend to be lower cost than traditional fee-based or fee-only financial planners.
The downside? As anyone who has gotten stuck talking to an automated answering service on the phone knows, there is no substitute for a person when you need answers.
Automated advisors lack the ability to offer personalized advice. This might mean that your portfolio is not tailored to your specific needs, and you may get stuck investing according to what an algorithm thinks your goals are.
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