A “fee-only” financial planner is one who gets paid exclusively by the client. There are no commissions.
The client pays for the planner’s services either by the hour, project or plan. Some fee-only planners also manage assets, charging a percentage of “assets-under-management.” This percentage varies, but there are no commissions on products because the fee-only planner does not sell products. If a product is needed to complete a plan, the fee-only planner usually recommends a no-load or low-cost solution.
A “fee-based” financial planner can collect fees from a client for services just like a “fee-only” planner but they may also receive commissions and other 3rd party compensation. They may charge fees to create a financial plan and/or to manage assets, but they are compensated from third parties for selling products. Some do a fee-offset, where they adjust their planning fee if client purchase products, or they charge either a commission or a fee.
While there are knowledgeable commissioned-based financial planners out there, the problem is the built-in conflicts-of-interest that exist with this way of doing business. We believe that when a planner’s income (or even a part of it) is derived from the sale of financial products, insurance, or third party relationships (such as vendors that offer special perks for promoting their products) it is likely that their thinking and recommendations will be influenced.
When a consumer selects a financial advisor or planner, they should understand how much the advisor or planner will be compensated. This information is needed in real dollar and cents and not just vague percentages.
Once the consumer knows how much directly and indirectly the planner or advisor will receive (such as with deferred loads and trailing commissions), along with the level of service to provided (comprehensive advice for all areas of your financial life or primarily limited to investment or insurance recommendations), only then can the consumer accurately assess if the services received are worthy of the payments.
Remember, fees and commissions come out of your investments. The more taken out, the less you have available to put to work for your life goals. Make sure you are receiving value for the fees paid.