Fee-Only vs. Fee-Based Advisor Compensation: What’s the Difference

A fee-only advisor is compensated only by the fees he or she directly charges and not by commissions earned from the sale of a financial product.  The fee they charge could be hourly, a flat retainer, or based on a percentage of your investment assets they manage.  

A major benefit of working with a fee-only advisor is that they have no inherent conflicts of interest and they generally provide more comprehensive advice.  Typically, fee-only advisors conduct their business under a “fiduciary duty,” which means by law, they must have their clients’ best interest at heart.  Many fee-only advisors carry professional designations that hold them to strict codes of professional and ethical conduct.

Fee-based advisors are generally compensated by both fees for advice and commissions on the sale of financial products that may be used to implement their advice.  Most fee-based advisors hold licenses that allow them to sell investment products or insurance for a commission.  Fee-based advisors generally do not have a “duty to disclose” their method of compensation which often confuses clients who may not understand their fee-based advisors are working for commissions.  

There is an inherent “moral hazard” with commission-based advisors.  A moral hazard is a situation where a party has a tendency toward being more willing to take a risk, knowing that the potential costs or burdens of taking the risk will be borne, in whole or in part, by others.  Basically, anytime someone is paid on a performance basis, there is going to be a natural motivation to sell products that pay out the highest commissions.

Here at Shore Financial Planning (SFP) our team always has their client’s best interest in mind. We are a fee-only, fiduciary wealth management firm located in Monmouth Beach, New Jersey. SFP specializes in tax-focused wealth management that involves playing an active role not just in investment management, but integrating it with estate planning, insurance, retirement planning, business planning, goal setting, education planning, and also tax planning and tax preparation.