Fee-Based Financial Advisors and Fee-Only Financial Advisors

Financial Advisors are people operating within the boundaries of industry guidelines. Their main goal is the protection and financial freedom and feasibility of their clients. This means that Financial Advisors are very important for an organization. Now, in this article, we will read about fee-based and fee-only financial advisors.

Financial advisors guide your organization towards success. They can help you generate profits as well. These advisors select the appropriate clients too. In cases of confusion, they help you decide the right investors.

A Financial Advisor would help you fill in the gaps in your current financial architecture. Any errors that you wouldn’t have seen can be rectified by the Advisor you have hired. This is the reason why people Advisors exist in the first place.

He/she has training, knowledge, and experience in dealing with all kinds of problems, crises and can advise you on the best way to manage your finances. He/she can help you legally with tax issues and might save you a large chunk of your money.

The Key Tasks of a Financial Advisor

It is essential to choose the best of the best Advisor. He/she would hold a key position in your organization. Hence, you must decide with much thought.

i. Financial Advisors have a lot of knowledge regarding the market. They know how and when to separate the useless from the useful. Hence, Financial Advisors share their expertise. Their expertise helps you decide the right investment, investor, and client.

ii. Their main role in an organization is the market it seeks to cover. They are responsible for the execution of trades in the current market. They have to decide what scheme to implement to avail maximum benefits.

iii. It is the job of the Advisor to keep evaluating their client’s growth. They need to discuss the plan, strategies, etc. and give suggestions. They need to oversee the whole financial aspect of the company. Any oversight on their part could be disastrous.

So, it is clear that a Financial Advisor is a key position. You can’t just appoint anymore. Now, you should know that there are two kinds of Advisors :

• Fee-Only Financial Advisors
• Fee-Based Financial Advisors

1. Fee-Based Financial Advisors

Fee-Based Financial Advisors are those who charge a certain fee annually. This fee corresponds to the assets under their management. They can charge a percentage of Assets Under Manage or AUM as a fee.

Let’s Consider An Example

Assume you have given assets that amount to 1 crore Rs under the management of an Advisor. Let it be that the Advisor charges 2% fees for managing these assets of yours. Then, his fee would be around 2 lakh Rs.

This is how a fee-based Financial Advisor works. Now, we can see that the fee-based Advisor not only receives payments by the client but also through the commissions on assets. This is, at times, an issue with many clients.

The Effects Of Hiring A Fee-Based Financial Advisor

Fee-based Financial Advisers receive money from commissions. This means that they can direct the finances towards their own profit. This might create a conflict between the Advisor and his/her client.

This can harm an organization. Also, at times the reputation of the company is harmed. Hence, a fee-based Advisor has this crucial drawback.

Also, fee-based Advisors charge a fee that is not performance-based. This means that you will have to pay them in full irrespective of whether you profit off them or not. They will charge even in times of loss or bankruptcy.

Also, the fee-based Advisors might have meetings with the clients on a monthly, quarterly, etc. basis. This means that there is not much freedom or says of the client here. It is for this reason that these Advisors are generally held at lower legal standards. So, they are be seen selling products which can be deemed suitable for their clients.

Many times, fee-based Financial Advisors don’t have a “duty to disclose” their payment method. This creates confusion when their clients won’t understand that their Advisor is in it for the commissions. Hence, you should be well aware of your Advisor’s compensation process and terms.

Now, let’s practically realize the drawback of hiring a fee-based Advisor. Let us consider the server at your local shop is motivated to sell some items for ABC company. As a commission, the server would benefit a 20% commission from each item they sell.

Then, a customer asks for a better product or a product of some other kind. Though the customer’s best interest should be taken into view, the server would suggest the product by ABC. This is because it would generate the most commission.

Before hiring an Advisor, any client should see that the Advisor works following his best interests and not their own. This is one of the major ill-effect of hiring a fee-based Financial Advisor.

Though there are benefits too, these Advisors guarantee your sales. They would work for their profit when they get the change. But this gives them the motivation to achieve sales. Though your vision might conflict, sales are guaranteed.

Their fee is commission-based, too; hence, they don’t charge a hefty upfront fee. But, this means they work by their vision and will. You can’t force them to work per your benefits. They would advise you to invest where their share of profit would be the most.

In the end, it all boils down to this conflict of interest. This fact discourages people from hiring such Advisers. Though they might be effective, they won’t care about your motives. You can say they are not bound to your vision or plans. They would suggest their own plans and work according to their own will.

Consider a situation wherein the Adviser gets two offers. Both of these investors offer the same stipulations, but one works with your vision. Others don’t agree with it. But, if the latter provides a higher commission to the Advisor, of course, they would suggest the latter’s name.

This whole process is called suitability. Suitability means that the sale of products or investments should be considered following the client’s goals. In the above case, both the offers can be considered suitable, but the latter is chosen.

So, one more kind of advisor exists to save you from this type of problem.

2. The Fee-Only Financial Advisors

Fee-only Financial Advisors are those that implement a fee on all and every transaction. This fee is fixed and is not subject to any change. Be it loss or profit; the company is liable to pay a fixed sum. This sum doesn’t change in the greatest circumstances.

This Advisor has to be paid in full by the client. The fee they charge could also be a percentage of AUM or Assets Under Management. This fee is around and about 1% of the market value of the client’s organization. The fee-only Advisor’s fee could be an hourly wage or a flat retainer.

The main aspect of the fee of these Advisors is that they do not receive commissions. This means that they earn no extra money through the sale of extra products. Any product sold comes entirely under the client.

Hence, it can be said that the fee-only Financial Advisors are acting as “fiduciary.” This term is prevalent in the market. This term means that the Advisor has to put his needs aside. His needs should never clash with the client’s needs.

In the case of clashes, the client is to be given priority first. These Financial Advisors are very beneficial and provide freedom. You are given the financial freedom to gather your finances. No one would guide your profits and investments otherwise.

You might think that every Advisor is required to work in this way. No, many Advisors work on a “suitability standard.” This means that they would work according to their needs. You can say that they would work in a direction that is profitable to their standards.

If they were to profit from a certain product’s sale, the fee-only Advisors wouldn’t work in that direction if it isn’t feasible for the client. This is because their fee is fixed. There is no other income for them. In such cases, you can say they are profitable to a greater extent.

If you have the money in your pockets then, you should opt for this type of Advisors. Though there is this fact too, that you won’t get any guarantee. If the Advisor is not able to deliver, you would be left with no option. You would then have to invest more to overcome any loss.

Before hiring any such Advisor, you have to see if the Advisor is effective enough clearly. Ask specific questions related to your product and also ask situation based questions. Listen to the Advisor’s plan on how he tends to solve conflicts.

If he has a sound knowledge of the market, it will reflect in his answers. This means that his previous experience, too, is important. We can say that a fee-only Advisor has to be vetted carefully. If the Advisor’s points are correct, and in line with your vision, you can benefit greatly.

Effects of Hiring a Fee-Only Financial Advisor

The fee-only Financial Advisors won’t receive any commission. This means there’s no compensation in any form via any brokerage firm, insurance, or mutual funds of any kind. The only compensation they’d receive through their client.

There is a fixed rate or amount that is provided at the beginning. Because there’s no commission involved, they are bound by fiduciary responsibilities. This means they will choose the best client, investor, or plan for you. Their profits won’t guide Their decisions.

Hence, they’ll choose the most secure and cost-efficient investment or client for you. They would ensure no mutual funds, marketing, hidden costs related to your investments, etc. Hence, it would be beneficial for you if you appoint a fee-only advisor.

The freedom from any motivated guidance would profit you a lot. Any obstruction to your financial stability is removed. Hence, your assets are safe, and there are no losses on your part. No unnecessary stocks, bonds, mutual funds, insurances, etc. are a part of your transactions.

Also, the fee-only Financial Advisors don’t sell their plans directly to the client. This is in line with their fiduciary status. Hence, no, no conflict of interest exists, and your organization would run fluently and without obstruction.

The Bottom Line: Let’s Compare

Well, if you are looking to hire a Financial Advisor, you would definitely compare. It will be your concern if the Financial Advisor is suggesting products according to his or your needs. This is a major point of difference between both Advisors.

Hence, it should be clear now that they both are entirely different. The Fee-Only Advisors have a fiduciary status. They are bound to work following your goals, plans, and visions. The Fee-Only Advisors are only bound to work for their benefits, and hence, they do so. A part of their salary comes from commissions through investments or product sales.

Here we can see that both types of Advisors have different motivations. One is bound to work for your profit and plans other isn’t. This creates a major difference between them. The Fee-Based Advisors are often related to conflicts of interest, but the Fee-Only Advisors are far from any such conflicts.

But, Fee-Only Advisors charge a hefty fee. This prevents small-time companies from appointing them. However, it can be overcome in the long run.

So, Are Fee-Only Financial Advisors the Better Option?

Well, the answer could be yes and no. This depends upon your budget. Fee-based Financial Advisors charge a very high fee. They are very costly. Let’s say the Advisor directs you to buy a commission-based item. If the Advisor can’t sell the product, then the client would have to spend more.

Spending more means adding more steps in the process. The process itself is very complex at times. Also, now to sell the bought products, the client would have to bring in brokers. The broker would receive commission so, and now the overall cost increases manifolds. For wealthy clients, the fee-only Financial Advisor could be the best option. But for those who are just setting up their firm, it’s not feasible. Also, out-of-pocket costs can be associated with such ventures, and hence, the decision must be carefully made.

Now, the high fees of fee-only Advisors don’t mean there are very efficient. It could be that they don’t work up to the mark. Also, at times, they don’t provide any results. Regardless, payment has to be completed.

This is a weak point of hiring fee-only Advisors. Suppose you think that a fee-only Advisor who has great respect in the teaching field would survive in the insurance field. Hence, there are drawbacks to these Advisors too.

So, it can be seen that you have to choose the kind of Advisor following your needs. You can’t go with the flow. The decision must be well thought and follow your budget—the Financial Advisor, an important instructor for you.

If you bring in the right person, then the sky is the limit. You have to get a crystal clear view of all the steps. Hiring a fee-only or fee-based Financial Advisor is difficult. It takes time and patience. Go through their work experience, and their field of expertise, and also check their conduct.

If they seem too eager to make a commission, they will create conflict in the longer run. Also, you can’t pay too much for an Advisor. There are other costs, like marketing, too. Hence, before bringing in an Advisor, clear your doubts and work accordingly. You should also check the financial Health score.

FAQs