Have you ever come across a “fee-only” financial advisor?
How about one who is “fee-based?”
The two terms sound confusingly similar, but it’s the former most of us will want to seek out.
That’s because “fee-only” means you’ll pay that advisor only his or her fee, no matter how the two of you work together. Certified financial planners, who are held to fiduciary duty (they are required by their certification to act in your best interest), tend to be fee-only.
Fee-based advisors, on the other hand, start with their fees — and are then permitted to add commission on top of it, for selling products such as mutual funds or insurance.
The potential conflict of interest is obvious: When an advisor is compensated by what they sell you, they may be more likely to try and make that sale. Since they aren’t bound by fiduciary duty, they aren’t obliged to tell you if that sale is necessarily in your best interest.
Although it sounds tricky, fee-based advice isn’t inherently a bad thing. Sure, fee-based advisors are able to sell you financial products, but you’re free to make your own decisions about where your money goes. Plus, a particular fee-based advisor might be the best person suited to your situation, and with whom you feel most comfortable.
That said, working with one could cost you more than you expect to pay.
If you aren’t interested in taking that risk, most fee-only advisors disclose that fact right on their websites. And before hiring an expert, you can always ask. In fact, a commonly recommended question to ask a potential advisor is a straightforward way to distinguish between the two types of fee structures and determine exactly how a professional is compensated: “How do you make your money?”