What Does a Fee-Only Financial Advisor Do?

There are three main ways that financial advisors can be paid: through commissions on products they sell, a combination of fees from clients and commissions, or solely through fees from clients without any product-specific commissions.

Fee-only advisors can set their fees in various ways, such as hourly rates, flat fees, a percentage of assets, or a retainer. This model is considered to be most aligned with the fiduciary standard since advisors are not incentivized by product sales.

Another name for fee-only advisors is no-commission financial advisors. These advisors typically operate as fiduciaries, meaning they are legally obligated to give advice that is in the best interest of their clients.

The Fiduciary Standard and Fee-Only Advisors

Fee-only financial planners often act as fiduciaries, which requires them to provide advice that is in the client's best interest. This is different from the suitability standard, which allows advisors to recommend products that pay higher commissions, even if they may not be the best option for the client.

When choosing a financial advisor, it's essential to inquire about whether they operate as fiduciaries or under a suitability standard. Fiduciaries are legally required to prioritize their client's interests.

How Fee-Only Financial Advisors Operate

Fee-only financial advisors only receive compensation directly from their clients and not from any other sources like brokerage firms or insurance companies. This ensures that the advisor's loyalty is to the client, as they do not receive commissions from selling specific products.

Advisors may charge fees based on a percentage of assets managed, a flat annual fee, or an hourly rate. Understanding the fee structure is crucial before engaging with an advisor.

Fee-Only vs. Fee-Based Advisors

Fee-based advisors can receive fees from clients as well as commissions from selling products from various sources. This may introduce conflicts of interest, as the advisor may receive incentives from certain products.

Fee-only advisors have a fiduciary responsibility to select investments that align with the client's best interests. They typically use investments with low internal expenses, such as no-load mutual funds and stocks.

Finding a Fee-Only Advisor

Many fee-only advisors are members of NAPFA, the National Association of Personal Financial Advisors, which only accepts fee-only advisors. NAPFA offers a search feature on their website to help clients locate fee-only advisors in their area.

In conclusion, fee-only financial advisors operate solely on fees from clients, allowing them to prioritize the client's best interests. It is important to differentiate fee-only advisors from fee-based ones who may still collect commissions on top of client fees.