What is a Fee-Only Financial Advisor?
Fee only means you pay no commissions
Financial advisors operate within certain industry guidelines to protect investment clients. Fee-only financial advisors sometimes called "no commission" advisors can only receive compensation directly from you as the client, (like a CPA or attorney) versus being paid through commissions from products they sell. Many reasons exist as to why you'd want to consider a fee-only advisor to help you build out your financial life.
Fee-Only Advisors Have a Fiduciary Standard
Fee-only advisors, or fee-only financial planners, almost always operate as fiduciaries. "Fiduciary" means a person must legally give advice that is in her client's best interest.
Some might assume all financial advisors have a requirement to give advice that is in their client's best interest, but that's not always the case. A majority of the financial advice industry operates on 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, the advisor can recommend the product that pays him a higher commission, even if it might 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. Choose one that works as a 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 a fiduciary advisor who can offer advice for all of your investments, you will still have to do your homework.
How Fee-Only Advisors Receive Compensation
A fee-only financial advisor cannot receive compensation from a brokerage firm, a mutual fund company, an insurance company, or any other source besides you, the client. They represent you and your interests when giving you advice. When you think about where someone's paycheck comes from, that can give you a hint as to where they'll place their loyalty.
A fee-only advisor may charge you a rate that's based on a percentage of the assets they manage for you, and take it out of your account each quarter, or they might charge a flat annual fee or an hourly rate.
Some financial advisors use the term "fee-based" to describe how they charge for their services. Be careful, because fee-based is not the same thing as "fee-only."
Fee-Based: Not the Same as Fee-Only
A fee-based financial advisor can receive fees paid by you, and also commissions paid to them by a brokerage firm, mutual fund company, insurance company, or investment partnership. The advisor should disclose these fees to you.
Many advisors who use the term "fee-based" recommend something called a managed account.
Be aware that 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 manage accounts where they charge fees as a percentage of the assets, the investments they place inside these accounts can be quite 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, bonds and other investments that have no annual 12(b)1 (marketing or distribution) fees.
Regardless of how they receive their compensation, 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 specialize in certain areas, such as those who handle only retirement planning.
Decide which type of financial services you need so you know what type of advisor to look for.
Locating a Fee-Only Advisor
Many fee-only advisors belong to an association called NAPFA, the National Association of Personal Financial Advisors. Individuals may only join NAPFA if they work as fee-only financial advisors. NAPFA offers a search feature on its website to help you locate a fee-only advisor near you.