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The Difference between Fee-Only and Fee-Based Financial Planners

By Patrick S. Whalen, CFP®, CTFA

Read almost any article from a reputable source about how to obtain good financial advice and you will see the author recommend that you work with a fee-only financial planner. What exactly is a fee-only financial planner and how is that different from a fee-based financial planner?

The term “fee-only” was created first and is used to describe a financial planner who does not accept commissions and payments from third parties such as insurance companies and brokerage firms. Fee-only planners are only compensated by their clients and the result is the elimination of the conflicts of interest that come from accepting commissions.

The growing popularity of fee-only financial planners put advisors who wanted to receive commissions in a bad spot. Rather than rejecting commissions, they rebranded themselves as “fee-based” and continued to sell products on behalf of insurance companies and brokerage firms. In short, fee-based financial planners are financial advisors who accept both fees and commissions.

Compensation is not the only difference between fee-only and fee-based financial planners. Fee-only financial planners have a fiduciary duty to their clients 100% of the time, which means that they always have to serve the client’s best interest. Fee-based financial planners are not always required to act as fiduciaries and may therefore recommend solutions that are not in the client’s best interest.

Fee-based planners say that working with them is easier for the client because the advisor can provide advice and also sell products to the client at the same time. This doesn’t sound to me like an advantage for the client, it sounds like a conflict of interest that reduces the trustworthiness of the advice.

A fee-only financial planner can absolutely work with you to implement your financial plan. The key is that fee-only advisors do not profit from the purchase of any products, therefore we provide you with objective advice. We can also help you gain access to a broader array of solutions than fee-based planners can because we are not tied to a specific insurance company or brokerage firm.

Regardless of what type of financial planner you work with, please make sure to understand how the advisor is being compensated. If the advisor makes a recommendation, ask how much the advisor will be paid if you act on the advice. The answer should include a specific dollar amount or percentage. Listen to your gut feeling and if the advisor side-steps the question or seems uncomfortable then that tells you something. If you don’t feel good about what you are hearing then slow down the process and get a second opinion.

About the author:

Patrick S. Whalen, CFP®, CTFA is a fee-only financial planner located in Los Angeles and is the principal of Whalen Financial Planning. As a fee-only financial advisor, Patrick Whalen says no to commissions and referral fees.