Fee-Only vs. Fee-Based Financial Advisors: What's the Difference and Where Can I Find One in Sacramento?

The difference between a fee-only and fee-based financial advisor may seem small, considering the similarities in the names. But for residents of Sacramento and elsewhere, choosing between a fee-only and fee-based financial advisor can make a big impact on the service you receive and the amount you pay for financial advice. 

What Is a Fee-Only Advisor?

A fee-only advisor earns fees directly from clients, rather than receiving commissions for the products they sell. This structure can help eliminate the conflicts of interest that can arise when an advisor is paid by a company when you choose certain financial products. Those products can range from investments like mutual funds to insurance products like annuities. 

Fee-only advisors can differ, however, in how they charge clients for their services. One of the more common fee structures is to charge clients an annual percentage of their assets under management. Other options include flat fees, such as having a set rate to build a financial plan. Fee-only advisors can also charge hourly fees, similar to how a lawyer might bill for their time. 

What Is a Fee-Based Advisor?

Unlike a fee-only advisor that earns revenue from clients only, a fee-based advisor can earn both client fees and commissions from financial companies for selling their products. 

A fee-based advisor may also be called a commission-based advisor, and since the various terms can be confusing, it’s important that you clarify with a potential advisor how they earn revenue and what you would pay. Otherwise, you may not know whether the advisor is making an investment recommendation that would earn them a commission. 

Even if a fee-based advisor should be making recommendations that are in clients’ best interests (as a new regulation with a compliance date of June 30, 2020, mandates), you may not be comfortable knowing that an advisor is earning more by recommending one product over another.

Choosing Between a Fee-Only and Fee-Based Financial Advisor

Some argue that fee-based financial advisors can be less expensive than fee-only ones since fee-based advisors can earn commissions and thus may not charge as much in client fees. However, it’s important to look at total cost and the advisor-client relationship holistically. 

For one, just because upfront advisory fees may be less expensive if they’re offset by commissions, total fees will not necessarily be lower. Products such as annuities and some mutual funds can carry high fees that would be passed on to you. Products like index funds may not earn an advisor a commission but carry low fees for investors. 

A fee-only advisor using a percentage-based advisory fee would arguably be more inherently motivated to keep investment fees low. Doing so could help clients keep more of their investment returns, meaning there’s a higher balance from which an advisor can earn their revenue. 

Moreover, fee-only advisors who are also fiduciaries must act in clients’ best interests at all times, not just when making a recommendation like a fee-based or commission-based advisor.

When considering a fee-only vs. fee-based financial advisor in Sacramento, consider how a fee-only advisor acting as a fiduciary may be able to more comprehensively provide financial advice that puts your needs first. That means taking into account factors like California’s relatively high taxes into your financial planning, as well as considering local economic factors and how they can impact your financial goals.

In comparison, a fee-based advisor who does not serve as an ongoing fiduciary might not provide as much comprehensive support in your best interest.

Finding Financial Advisors in Sacramento

To find a financial advisor in the Sacramento area, it can help to narrow down which type you’re looking for. Otherwise, if you simply search Google for “financial advisors” in Sacramento, you may end up finding ones where you’re unsure about their fee structure.

Instead, you can look for financial advisors in your area using industry associations and regulatory agencies.  

For example, you can search the SEC’s website using your zip code to find financial professionals to see if they’re a Registered Investment Advisor, which means they are also fiduciaries. Similarly, you can use FINRA’s BrokerCheck to to determine if a financial advisor is a broker-dealer, which could indicate they are fee-based.

However, don’t rely on your search results. Make sure you clarify fee structures with any advisor you talk to.

More specifically, you can find fee-only financial advisors through the National Association of Personal Financial Advisors (NAPFA) or FeeOnlyNetwork.com. You can also find fee-only financial advisors who carry specific designations through those certifying organizations. For example, you can find a CERTIFIED FINANCIAL PLANNER™ (CFP®) professional in your area on LetsMakeaPlan.org.

Parkshore, an independent fee-only, fiduciary financial planner in Roseville, CA, has been providing comprehensive financial planning for over three decades. To discuss how we may be able to help you, please reach out to us to schedule a complimentary, 15-minute phone call.

This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.