What Is a Fee-Only Financial Advisor?

By Arturo Conde | AUG 30, 2023

Like the name suggests, a fee-only financial advisor is compensated solely by the fees that clients pay for the services they receive. These services can range from asset management and investment advice to traditional financial planning needs like retirement planning, saving for college tuition and tax planning. 

For asset management, a fee-only financial advisor’s fees are typically tied to how much money they are managing for a client. This type of compensation is known as an asset-based fee. However, for financial planning and consulting, an advisor may charge a fixed rate or annual retainer. 

Regardless of the specific fee structure, a fee-only advisor won’t be earning commissions from a broker-dealer or insurance company for selling you products and services. 

Fee-Only vs. Fee-Based: What’s the Difference?

Not all advisors work strictly on a fee-only basis. A fee-based advisor can collect commissions from third-party firms for recommending insurance or investment products, in addition to the fees that advisory clients pay them. While the client isn’t responsible for paying commissions, they may be negatively impacted by them. These dual roles can create a conflict of interest, as the advisor has a financial incentive to recommend certain products and services to advisory clients over other options. 

When acting in their advisory role, fee-based advisors must abide by fiduciary duty and recommend what’s in the best interest of their clients. But as brokers, they only have to make suitable recommendations. This duality can be different to navigate as a client, so when receiving advice, clients should understand fully what it’s based on, in which role it is being given and whether the advisor will benefit. 

Clients who work with fee-only advisors, on the other hand, don’t need to question why their advisor is recommending a certain course of action. Instead, they can rest assured their advisor is working in their best interests. 

However, it’s important to note fee structure is just one factor to consider when choosing a financial advisor. You may end up working with a fee-based advisor over a fee-only advisor for a variety of reasons, including the advisor’s experience level, expertise, credentials, as well as your personal rapport with them. 

How to Verify a Financial Advisor Is Fee-Only

So how do you determine whether an advisor is fee-only? The most direct way to find out is by simply asking them if they receive commissions outside of the fees they collect from advisory clients.

If you’re still researching potential advisors and haven’t yet begun interviewing candidates, consider reviewing the public records that firms with more than $25 million in AUM must file with the U.S. Securities and Exchange Commission. This paperwork, known as Form ADV, can provide key insights into an advisor’s business, how many clients they work with and how they are compensated. 

Form ADVs, which are accessible through the SEC’s Investment Adviser Public Disclosure website, are relatively easy to navigate once you’ve familiarized yourself with their format. Part 1A is a fill-in-the-blank form, while Part 2A is a brochure written in prose. 

When checking whether a firm employs fee-based or fee-only advisors, open Part 2A and scroll to Item 10 - Other Financial Industry Activities and Affiliations. In this section of the document, the firm will disclose whether any of its employees are also representatives of third-party firms, like broker-dealers or insurance companies. This section should also disclose whether advisors receive commissions for these other roles. If the firm is truly fee-only and doesn’t maintain any relationships with broker-dealers or insurance companies, it will likely say so in this section. 

It’s also important to realize the distinction between fee-only and fee-based advisors can be murky. A firm may note in Part 2A of its Form ADV that it does not sell products or services other than investment advice. However, the firm’s advisors may in fact be representatives of a broker-dealer or insurance company, and collect commissions when serving you in either capacity. 

Bottom Line

Fee-only financial advisors are compensated solely via the fees that advisory clients pay, not third-party commissions. They do not have the same conflict of interests that fee-based advisors potentially deal with. As a result, fee-only advisors are typically preferable to fee-based, although every situation is unique. A firm’s Form ADV will disclose additional roles that advisors have and note any potential conflicts of interest. 

Tips for Finding a Financial Advisor

• When searching for a financial advisor, it’s important to conduct due diligence. Pay attention to the firm’s fee structure, number of clients, account minimums and investing philosophy. Avoid the temptation to hire the first advisor you interview. Try to seek out three different advisors and pick the one that best aligns with your goals and financial situation. 
• A financial advisor can help manage your assets, plan for retirement and meet financial goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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