In simple terms, fee-only financial planners charge you based on an hourly, retainer, or per-project basis depending on what you need done in your financial life. Fee-only financial planners choose not to receive commissions from investment providers since they do not want to be “distracted” or swayed by the commissions that may incentivize them to sell you a certain type of product. If the purchase of a certain product or investment is necessary for your financial well being, you may have to find an outside person who will sell it to you. (This can sometimes cause a disconnect between your goals).
In essence the fee-only financial planner can give you a “prescription” for what financial products you may need, it is then up to you to go out there and get it from a different firm.
However, because fee-only financial planners forego the potential commissions that are offered to them by investment companies (if you choose to purchase an investment), they charge a higher hourly or project fee to compensate. For example, a fee-only financial planner may charge you $500 an hour since they know they will not earn any more than that. While a fee-based financial planner may charge you $300 an hour, considering that they may receive a commission if you decide to purchase an investment that suits your needs at some point. This allows the client to pay less than if the arrangement was fee-only.
“Both Fee-only and Fee-based advisors are Fiduciaries to their client, this means that they must place the clients best interest ahead of their own and their firms.”
“In essence the fee-only financial planner can give you a “prescription” of what you need, it is then up to you to go out there and get it.”
A Fee-Based financial planner is one who charges you an hourly, retainer or per-project fee and has the ability to also receive commissions from investment providers (should there be a need for you to use an investment product). This “hybrid” type of compensation structure often allows the fee-based financial advisor to charge a lower hourly fee than the fee-only financial advisor.
Both Fee-only and Fee-based advisors are Fiduciaries to their client, this means that they must place the client’s best interest ahead of their own and their firms. Unlike most financial advisors who are under the Suitability obligation.
Sam Rad is a Certified Financial Planner who has multiple licenses. This requires of him to act in a Fiduciary capacity for clients while being able to give them the choice of a fee-only or fee-based financial planning engagement. There is no right-or-wrong way of choosing whether your financial advisor should be fee-only or fee-based. Clients can choose which method they are comfortable with and which makes most sense for their scenario and budget.