What is a Fee-Only Financial Advisor?

Fee only means no commissions.

Two people standing on a balancing scale.
Fee-only advisors do not collect commissions for selling products. Martin-Barraud/OJOImages/GettyImages

Another word for a fee-only financial advisor would be a "no commission" advisor. Fee-only advisors can only receive compensation directly from you (like a CPA or attorney) versus being paid by commissions from products they sell. There are many, many reasons why you would want to choose a fee-only advisor. 

Fee-Only Advisors Have a Fiduciary Standard

Fee-only advisors, or fee-only financial planners, almost always operate as fiduciaries.

A fiduciary must legally give advice that is in their client's best interest. 

You would think all financial advisors would be required to give advice that is in their client's best interest - but that is not so. The majority of the financial advice industry has a "suitability standard." Suitability means a recommendation must be appropriate based on your financial status and goals - but if one product pays the advisor more than another, and both are suitable, they can recommend the product that pays more even if it may not be the best choice for you out of the two options. Ask a potential advisor if they have a fiduciary responsibility to you or a suitability standard. You want the answer to be fiduciary.

Starting in summer 2017, due to a new Department of Labor law called the Fiduciary Rule, a fiduciary standard may apply to almost all financial advisors who give advice on retirement accounts.

This new fiduciary rule, however, still won't apply to advice provided on investments held outside of retirement accounts. That means to find an advisor who can offer advice in your best interest you will still have to do your homework.

How Fee-Only Advisors Are Compensated

A fee-only financial advisor cannot receive compensation from a brokerage firm, a mutual fund company, an insurance company, or any source other than you.

They represent you and your interests when giving you advice. I think it makes sense to seek out fee-only advisors, after all, think about where someone's paycheck comes from, and that will tell you quite a bit about where their loyalty lies.

A fee-only advisor may have a rate that based on a percentage of the assets they manage for you, and thus debited out of your account each quarter, or it could be a flat annual fee, or an hourly rate. 

Some financial advisors use the term "fee-based" to describe how they charge for their services. Fee-based is not the same thing as "fee-only."

Fee-Based Is Not the Same As Fee-Only

A fee-based financial advisor can receive fees paid by you, and commissions paid to them by a brokerage firm, mutual fund company, insurance company, or investment partnership. These fees should be disclosed to you.

Many advisors who use the term "fee-based" recommend something called a managed account. The investments offered inside this managed account may pay incentives to the company the advisor works for, which means it may not be as objective as it appears. 

Even though both fee-only and fee-based financial advisors may have accounts they manage where they charge a percentage of the assets, the investments they place inside these accounts can be very different.

Fee-only financial advisors have a fiduciary responsibility to choose investments that are in your best interest. They typically use investments that have low internal expenses, such as no-load mutual funds, stocks, and bonds; investments that have no 12(b)1 fees.

Regardless of how they are compensated, financial advisors differ in the services they offer. Some offer only investment management, while others include financial planning as part of their offering, and some are specialists, such as those who specialize in retirement planning. It is important to decide which type of financial services you need so you know what type of advisor to look for.

Where to Find a Fee-Only Advisor

Many fee-only advisors belong to an association called NAPFA, the National Association of Personal Financial Advisors.

Advisors may only join NAPFA if they are fee-only financial advisors. NAPFA offers a search feature on their website which you can use to locate a fee-only advisor near you.