By: Reed Fraasa, CFP®, AIF®, RLP®
Choosing the right financial advisor is one of the most important decisions you'll make for your financial future. But with so many types of advisors and compensation structures, it can be challenging to know where to start. In this video, Reed Fraasa, a Certified Financial Planner® and founder of Highland Financial Advisors, breaks down the key differences between "fee-only" and "fee-based" financial advisors. Understanding these distinctions is essential for making informed decisions about your financial planning needs—especially when it comes to advisor compensation, potential conflicts of interest, and the level of fiduciary responsibility. Whether you're just getting started or reevaluating your current advisor, this guide will help you navigate the complexities of financial advisory services and choose the best fit for your goal
Introduction to Fee-Only vs. Fee-Based Financial Advisors
Hello, my name is Reed Fraasa. I am a Certified Financial Planner (CFP) and the founder and Wealth Advisor at Highland Financial Advisors. Today, I want to clarify the differences between "fee-only" and "fee-based" financial advisors. Understanding these terms is crucial as they reflect different compensation models and regulatory requirements, impacting the advice you receive and any potential conflicts of interest. Understanding the distinctions between fee-only and fee-based advisors allows you to make more informed decisions about your financial planning needs.
What is a Fee-Only Financial Advisor?
Compensation Model of Fee-Only Advisors
Fee-only advisors are compensated exclusively by the fees they charge clients, similar to how accountants or attorneys operate.
Fiduciary Standard of Fee-Only Advisors
All fee-only advisors are fiduciaries, meaning they are legally obligated to act in their client's best interests.
No Commissions or Third-Party Payments for Fee-Only Advisors
Fee-only advisors do not receive commissions or compensation from third parties for product recommendations.
Regulatory Oversight for Fee-Only Advisors
They are generally regulated by the Securities and Exchange Commission (SEC) for firms managing over $100 million or by state securities bureaus for smaller firms.
What is a Fee-Based Financial Advisor?
Dual Compensation Model of Fee-Based Advisors
Fee-based advisors may charge fees for advisory services but can also earn commissions from product sales.
Fiduciary vs. Broker: The Role of Fee-Based Advisors
When charging fees, they act as fiduciaries, but when receiving commissions, they act as brokers, which can create conflicts of interest.
Regulatory Bodies for Fee-Based Advisors
They are subject to SEC or state securities regulation for advisory activities and FINRA for broker-dealer activities. State insurance departments regulate insurance products sold by fee-based advisors.
Potential Conflicts of Interest with Fee-Based Advisors
The dual compensation model may lead to conflicts between the advisor's financial interests and the client's best interests.
Reed Fraasa's Journey from Fee-Based to Fee-Only Advisor
Experience with Dual Registration: Pros and Cons
Highland Financial Advisors was initially a dual-registered firm, operating both as a fee-only advisor and a broker-dealer, which involved complex and costly compliance requirements.
Transition to Fee-Only Financial Advisor
In 1998, we transitioned exclusively to a fee-only model to reduce regulatory burdens and eliminate conflicts of interest, enhancing alignment with clients' interests.
Business Considerations of Dual Registration
Maintaining dual registration requires managing separate compliance records and can be challenging. Fee-only advisors avoid these complexities by forgoing commissions.
Current Custodial Practices for Fee-Only Advisors
Client assets are held with Charles Schwab, an independent and secure discount custodian, where we provide advice and portfolio management without commissions.
Essential Questions to Ask a Financial Advisor
Transparency on Compensation Structure
Ask if the advisor is fee-only or fee-based and how much of their business relies on commissions versus fees.
Product Commissions and Potential Conflicts of Interest
Inquire if a commission is associated with a product recommendation and how much the advisor will earn.
Regulatory Alignment and Ethics in Financial Planning
Fee-only CFPs are required to disclose compensation structures. Ensure you understand the costs and the advisor's earnings from the relationship.
Awareness of Conflicts of Interest in Fee-Based Advising
Fee-based advisors may have a more complex regulatory structure, creating potential conflicts. Understanding these can help you make an informed decision.
Conclusion: Why Choosing the Right Financial Advisor Matters
Understanding the distinctions between fee-only and fee-based advisors can significantly impact financial decisions. If you'd like to learn more or have a complimentary consultation, please visit our website to schedule a meeting. We offer free initial consultations, available both in-person and via Zoom.
Reed C. Fraasa is a CERTIFIED FINANCIAL PLANNER™ and founder of HIGHLAND Financial Advisors, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, and investment management. Reed has 30 years of experience as a fiduciary advisor and is the author of The Person is the Plan®, a unique financial planning process. Reed was a frequent guest contributor on PBS Nightly Business Report and has been featured in the New York Times, Wall Street Journal, and Star Ledger newspapers.