Two types of financial advice known as “fee-only” and “fee-based” sound very similar, and many people get these terms confused. Although they may sound alike, they represent different payment structures and legal requirements under the law.
What Are Fee-Only Financial Planners?
A fee only financial planner in Minneapolis, MN is only permitted to collect payment through client fees. The client fees can be based on a percentage of the total assets under management or charged as a flat fee or hourly rate. Planners who state that they are “fee-only” do not sell any products; therefore, they receive no compensation from commissions. They do not have the same conflicts of interest inherent in a sales model.
Fee only financial planners are typically also fiduciaries. As fiduciaries, they must make recommendations solely under the Fiduciary Standard in the best interest of the client as required by the Securities and Exchange Commission (SEC) Investment Advisors Act of 1940.
What Are Fee-Based Financial Planners?
Advisors or financial planners who are fee-based collect payments from clients. In addition to client fees, these fee based financial planners can collect compensation from commissions earned from products they sell to clients. These products include mutual funds, annuities, and insurance. These investment professionals have a conflict of interest because they may wish to earn commissions and meet sales quotas at their firm. Fee based financial planners are often also classified as broker-dealers who are regulated under the Securities and Exchange Act of 1934. They are not fiduciaries, and they are only obligated to operate under a Suitability Standard. They do not have to act in the client’s best interest but only have to offer “suitable” advice.
Many people assume that all financial planners operate in the best of interest of the client and under the same laws, but this is not true. Only fee only fiduciaries operate under the more rigorous legal standard.
