The reality is many consumers don’t know how their financial advisor (or potential financial advisor) gets paid, or how their advisor’s compensation can impact the service they receive. This can lead to confusion and skepticism.
When looking for a financial planner, we recommend people ask prospective advisors who they are compensated by and for what.
There are three main types of compensation models for financial advisors:
At Elwood & Goetz, we are a fee-only firm, by choice and by values. But what exactly does fee-only mean and how is it different for you?
Let’s talk about the meaning of fee-only financial planning and how it compares to commission-based and fee-based advisors, the benefits of working with a fee-only financial planner, and how to find and verify that you’re working with a fee-only financial planner.
Fee-only vs. fee-based vs. commission-based financial planning
In a nutshell, the primary factors that differentiate the three compensation models for financial advisors are:
- Who pays the financial advisor
- What the client is paying the advisor for
- The type of services and advice the advisor provides
Fee-only financial planning
Fee-only financial advisors are paid directly and solely by their clients (that is, the people they are providing financial advice and asset management). They do not accept commissions or third-party kickbacks.
As a client, when you work with a fee-only financial planning team, you’re paying for their advice and, in many cases, to manage your investments.
Fee-only registered investment advisor firms (RIAs) have a fiduciary duty. That means they are obligated to put their clients’ interests ahead of all others (even their own). Because of this high level of duty, fee-only advisors are able to provide comprehensive advice that covers many areas of a client’s financial life.
Commission-based financial planning
If fee-only is on one end of the spectrum, commission-based is on the opposite end. Instead of being paid solely and directly by clients, commission-based advisors are paid by insurance and investment companies. These companies have agreed to pay commission-based advisors (often referred to as brokers) a commission for promoting and selling the companies’ products.
So, where fee-only advisors are paid directly by you for the advice provided for you, commission-based advisors are paid by corporations for selling their products to you.
Because commission-based advisors are more susceptible to conflicts of interest (after all, they’re only going to recommend products that will earn them a commission), they are held to a lower standard of care than fee-only advisors and are limited in the advice they provide. Specifically, the advice they provide must be solely incidental to the product they’re selling.
Ultimately, fee-only planners focus on providing and implementing financial advice; commission-based brokers focus on selling financial products.
Fee-based financial planning
To make matters more confusing for consumers, there’s also fee-based financial planning. If you’re searching for a financial planner, you should take great care not to confuse fee-only and fee-based advisors. Although they are similarly named, there are clear distinctions.
Fee-based financial advisors act in a hybrid model. That is, they are sometimes paid for the advice they provide to a client and also sometimes paid commissions for selling products to that very same client.
So, fee-based advisors get paid commissions for selling insurance policies and specific investment funds to the same clients who pay them directly for advisory and investment management services.
Understandably, this could generate a level of skepticism and confusion for clients. Consider this: a fee-based advisor acting as a fiduciary can at one moment recommend that their client obtain a life insurance policy; then remove their fiduciary hat and recommend a specific life insurance policy that will earn the advisor a commission. This can create a sense of dual loyalties for a fee-based advisor — loyalty to the client and loyalty to companies that pay them commission.
Benefits of working with a fee-only financial planner
With an understanding of how financial advisors get paid (and who pays them), you can begin to see some clear advantages of working with a fee-only financial planner.
Transparent, easy-to-understand fees
With fee-only financial planners, the fee that a client pays is clear and easy to understand, especially since it is coming directly from the client to the advisor. While different fee-only firms may use different fee structures (for example, some may base their fee on the value of the assets under their management while others may use a subscription model or hourly fee), they are all paid directly by their clients and not by outside entities or corporations.
Commission-based fees can be difficult to understand because clients are not paying their advisors directly and the commission can vary based on the specific product. Commission on investments can typically range between 3%-6%. That commission is taken from the money you’re investing. With insurance products, the commission is often built into your premium payments.
Access to more financial solutions and products
Fee-only financial advisors are not restricted to a narrow set of insurance products or investment funds since they don't rely on (or accept) commission-based agreements. For most fee-only financial planners, their only incentive is for their clients to succeed. As a result, they benefit by considering more options and recommending the most optimal solutions for their clients.
Minimizes conflicts of interest
Fee-only financial advisors are often held to a fiduciary standard of care, and working with a fiduciary can have a major impact on the outcome of your financial plan. As a fiduciary, fee-only advisors are legally obligated to always put their clients’ best interests first. Because they don’t earn commissions or kickbacks, fee-only advisors prioritize the solutions that are best for their clients and minimize outside conflicts of interest.
Fee-based and commission-based advisors, on the other hand, are directly compensated by companies for selling specific products, creating potential conflicts of interest.
Unbiased, objective financial advice
By avoiding conflicts of interest and acting as a true fiduciary, fee-only financial planners are able to provide unbiased, objective advice 100% of the time. Their recommendations will be based on evidence and experience, not the value of a commission check.
This removes the burden of skepticism that may come from working with commission-based advisors (“Is my advisor’s recommendation truly what’s best for me? Or is it what’s earning them the largest commission?”). After all, objectivity and peace of mind are often the primary reasons people hire financial advisors in the first place.
Financial advice is the primary focus
Fee-only financial advisors are not concerned with pushing or selling products. Because they are paid directly by clients for the advice and implementation services they provide, their focus is on providing optimal recommendations.
At the end of the day, fee-only financial planners are focused on providing financial advice and implementation. Commission-based brokers are salespeople driven by selling products.
Drawbacks of working with a fee-only financial planner
While the benefits of working with a fee-only advisor are significant, there are a couple of perceived drawbacks.
Limited offerings outside of financial advice and asset management
Because fee-only planners don’t sell products — like insurance policies or annuities — you’ll have to find and work with another professional if you need to obtain these. Adding another person into the mix can seem a little daunting and may require additional research, meetings, and communication.
That said, as fee-only planners, we have established strategic partnerships with reputable professionals to refer our clients to when needed (like insurance brokers). And because we never accept commissions or referral fees, our only incentive is your success. As such, we are diligent and mindful about which professionals we refer our clients to.
Higher asset minimums
The only source of revenue for fee-only planners is their clients. As a result, they may have higher asset minimum requirements than commission-based and fee-based advisors.
How much do fee-only financial planners cost?
The commonality among all fee-only financial planners is that they are paid directly (and exclusively) by their clients. The exact amount they charge is based on their specific fee structure. Some of the most common fee structures for fee-only planners include:
- Assets under management (AUM). Fee-only planners who provide comprehensive services often have AUM-based fee structures. They charge clients a percentage (such as 1%) of the value of the client’s assets under their management.
- Retainer or subscription fee. Some fee-only advisors may charge a flat annual or monthly fee for their services. The fees vary based on the complexity of the client’s financial situation, the value of their investments, or their net worth.
- Project-based. Some fee-only advisors will charge fees based on short-term projects. For example, they may agree to put together a one-time financial plan but won’t be responsible for implementing any recommendations.
- Hourly. Similar to the traditional attorney billable model, some financial advisors charge their clients based on an hourly rate. This may be attractive for clients who aren’t ready to delegate all of their financial planning but need some immediate, short-term advice.
At Elwood & Goetz, we use an AUM-based fee structure. With an AUM fee-only model, our success is a direct reflection of our clients’ success. Unlike some fee-only firms, our fee includes both comprehensive financial planning and investment management.
How to find and verify a fee-only financial advisor
If you’re interested in working with a fee-only financial advisor, then you may be wondering how to find one. Here are a few tips.
Ask the advisor directly
One of the most important questions you can ask a financial advisor is, “How are you compensated?” Related questions are, “Do you accept commission or referral fees?” and “Who all do you accept compensation from?” By asking these questions directly, you should be able to get a clear answer. Sometimes it’s best to ask these questions over email, so you can get the answers in writing.
As extra due diligence, you may request a signed fiduciary oath from the advisor committing to act in your best interest 100% of the time. Here is ours.
Review disclosure documents
Financial advisory firms are required to file regulatory disclosures with the SEC and/or FINRA. Many of the details in these filings are available for free to the public. An example is Form ADV, which is like a financial planning firm’s resume, fact sheet, and background check. On the Form ADV, you can see how a financial advisory firm receives compensation and its fee structure. These are available on the SEC’s website. Here is our Form ADV, for reference.
Fee-only associations and networks
There are a number of organizations dedicated to advancing fee-only financial planning. Many of these also have “find an advisor” features on their website that allow consumers to enter their zip codes and find fee-only advisors near them. These organizations vet advisors to ensure they are fee-only before listing them on their platforms. Some reputable examples include:
- National Association of Personal Financial Advisors (NAPFA)
- Fee-Only Network
- XY Planning Network
- Garrett Planning Network (specializes in hourly-based fee-only planners)
Why is Elwood & Goetz a fee-only financial planning firm?
We believe that fee-only financial planning is the best way and right way — and for us, the only way — to do business as a financial planning firm. It helps avoid potential conflicts of interest, enables our advisors to provide truly comprehensive and unbiased advice, and puts the client at the center of every recommendation.
As a fee-only and independent firm, we don’t have to worry about obligations to outside corporations or shareholders. Our clients know exactly what they’re paying with no questions about the motivations behind our financial advice.
Our commitment to fee-only planning is what led to the opening of Elwood & Goetz. When our firm’s co-founders Lindsay Elwood and Dr. Joe Goetz first moved to Athens, Georgia, there were no fee-only firms in the area. Rather than joining a firm operating in the typical way of commissions and conflicts of interest, they decided to start their own fee-only firm.
We believe that financial planning is critically important and should be approached as a helping profession focused on solving real problems clients are facing. We opened our doors with one client and a promise to show up every day, deliver the best work for them, and always put their best interests first. Our fee-only model enables and strengthens that commitment, even as we grow.
Conclusion: What is a fee-only financial planner?
There are three primary compensation models financial planners fall under: commission-based, fee-based, and fee-only.
While commission-based and fee-based advisors receive some compensation from investment and insurance companies for the products they sell, fee-only financial planners are paid directly and exclusively by their clients for unbiased advice, ongoing implementation, and asset management.
Fee-only advisors never accept commissions or referral kickbacks. Their recommendations aren’t restricted to specific investment funds or insurance products. Their clients — not outside shareholders or third-party corporations — are at the heart of every decision. That’s because fee-only advisors are focused on providing optimal advice for their clients, not selling products.
The amount fee-only financial planners charge is based on their specific fee structure. Some fee-only advisors base their fee on the value of the assets under their management (AUM). Others may use a subscription model, a project-based fee, or an hourly rate. The common factor for all fee-only advisors is that their only source of revenue is their clients.
The fee-only financial planning model lends itself to more transparency for consumers and an easier-to-understand fee. It also enables advisors to focus solely on doing what’s in their clients’ best interest and helps minimize conflicts of interest.
If you’re ready to spend less time self-managing your money and interested in working with a fee-only financial planner, our team is here to help. With personalized service and unbiased advice, we can help bring order and clarity to your financial plan. Book a no-cost discovery call today to learn more.