What You Need To Know About Fee-Only Financial Advisors

When seeking out financial guidance, one of the first decisions you’ll face is how your advisor gets paid. While some earn their keep by commissions on what they sell, fee-only financial advisors charge only a straightforward rate for their services.

This distinction can significantly impact the advice you receive.

How Financial Advisors Get Paid

When looking for an advisor, it’s crucial to understand how any advisor you consider will be compensated. Here are the most common payment structures:

Fee-Based Services

• Hourly or flat-rate fees for specific planning services
• Can be one-time consultations or ongoing relationships
• Fees typically depend on how complex or specialized the work is

Percentage of Assets Under Management (AUM)

• Charge a percentage of your total invested portfolio
• Typically ranges from 0.75% to 1.5% annually
• May include additional planning services beyond investment management

Commissions

• Advisors earn money when you buy or sell financial products
• May receive ongoing trailing commissions from mutual funds or annuities

Hybrid Approach

• Also known as “fee-based” (different from fee-only)
• Combines fee and commission-based compensation
• May charge planning fees while also earning product commissions, introducing potential conflicts of interest

Advantages of Working With a Fee-Only Advisor

The main advantage of working with a fee-only financial advisor is that you align your interests. When your advisor’s income doesn’t depend on selling specific financial products, you can be more confident that their recommendations are based on your needs, not their compensation.

In traditional commission-based models, advisors might feel pressured to recommend their firm’s proprietary products or higher-commission options. Some registered representatives are required to favor their employer’s investment products—even if better alternatives exist elsewhere.

Fee-only advisors limit these conflicts by accepting only direct client payments. They don’t receive referral fees or commissions from financial products. In addition, most have a fiduciary obligation to you—a legal requirement to act in your best interest.

While all financial professionals must provide recommendations that are at least suitable for your needs, fee-only advisors who are registered investment advisors or certified financial planners (CFPs) are held to a higher legal standard.

Another key benefit is flexibility. Many fee-only advisors offer consultations or services for specific financial needs. Whether you need a second opinion on your investment portfolio or a comprehensive financial plan review, you can typically engage their services for a preset fee without worrying about hidden charges or long-term commitments.

Disadvantages of Using a Fee-Only Advisor

While fee-only advisors bring transparency and limit conflicts of interest, there are a few drawbacks to consider:

• Cost concerns: Fee-only advisors often charge higher upfront fees compared with commission-based advisors. This can be a hurdle, particularly for investors with smaller portfolios or limited financial activity. For example, small investors might find that commission-based models offer better pricing for low-transaction needs.
• Limited product offerings: Because fee-only advisors don’t sell commission-based products, clients might need to work with additional professionals for certain needs, such as buying specialized insurance products.
• Potential for a lack of incentives: Fee-only advisors might lack direct financial motivation to optimize portfolio performance beyond their fiduciary obligation. Whether your portfolio thrives or struggles, their compensation may remain unchanged, which could affect their drive to maximize returns. That said, for those that charge a percentage of AUM, their fee would increase as the size of your portfolio does.
• Competency isn’t guaranteed: While the fee-only label often conveys professionalism, it doesn’t guarantee expertise. Advisors may specialize in areas irrelevant to your needs, such as focusing on retirees while you are early in your career. It’s critical to check their qualifications and ensure their experience aligns with what you need.
• State restrictions on insurance reviews: In some states, fee-only advisors may face legal limitations on charging for insurance product evaluations, potentially restricting the scope of their advice in critical areas like life or disability insurance.

How To Find a Fee-Only Advisor

Several professional organizations can help you connect with qualified fee-only advisors:

• The National Association of Personal Financial Advisors offers a platform where you can find an advisor in your area. You just need to search by zip code and specialization to find a range of advisors, from small firms to large brand-name companies.
• The Garrett Planning Network connects clients with fee-only advisors who offer hourly services. While some members overlap with NAPFA, Garrett advisors often focus on providing more flexible, as-needed financial guidance.
• Certified public accountants with the personal financial specialist or PFS designation often provide fee-only services, though this isn’t guaranteed.
• The CFP Board maintains a directory of certified financial planners , but you’ll need to specifically ask about their compensation model.

Remember that professional designations alone don’t guarantee that an advisor is fee-only. Always verify how they’re compensated by asking directly.

The Bottom Line

Choosing between fee-only and commission-based advisors isn’t just about the costs. Fee-only advisors offer transparency and fewer possible conflicts of interest, but they may cost more upfront and have certain limitations in their service offerings.

Commission-based advisors might make sense if you have a smaller portfolio, trade infrequently, need specific insurance or investment products, or prefer paying through product fees rather than direct service charges. Those who want comprehensive financial planning and prefer advisors with minimal conflicts of interest are more likely to seek out a fee-only advisor.