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  • Writer's pictureBridget Sullivan Mermel CFP(R) CPA

Fee-only or Fee-based financial advisor: What's the Difference?

Updated: Feb 16, 2022

What's the difference between a Fee-only or fee-based financial advisor? It turns out, the difference is significant.

We’ve talked in past episodes about how the financial industry using confusing language and half-truths; making if hard for real people to make informed decisions. On today’s episode of Friends Talk Financial Planning, we dig into another of these confusing topics: fee-only vs. fee-based.

Listen to Bridget & John discuss how one word makes a huge difference between what the financial advice industry wants you to think these phrases mean and what Wall Street actually means by them.

Fee-only means that a financial advisor is paid only by the client. While that sounds daunting, it minimizes conflict of interest and advice that favors the advisor not the client.

Fee-based means that the financial advisor is paid by the client AND can recommend annuities, insurance, and mutual funds that pay the advisor a commission.

We both talk about how it's human nature to be interested in getting service for free. Who doesn't like free! In the case of your finances, you want to clearly understand who and how your advisor is getting paid. Because an advisor typically knows a lot more about their recommendations than you do, you want make sure that they're not giving you advice that serves them more than you.

You want fee-only.

It turns out that the underlying difference between fee-only and fee-based is that a fee-only advisor is selling you advice. A fee-based advisor is selling you advice, plus recommending you invest in things that pay the fee-based advisor.

Thanks for watching and please subscribe!


John: It can be so hard to understand financial language, especially when you're trying to hire a financial advisor. In today's episode of Friends Talk Financial Planning. We're going to dig into one specific language thing and that is the idea of fee-only versus fee-based advice. Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.

Bridget: I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois. Hey, John, before we start, let's remind everybody to subscribe. It helps us get some credibility with YouTube, and it helps you get notified when we've got more episodes. So if you hit “Subscribe,” it helps us out a lot. Okay, John, now let's go on to the definitions of fee-only and fee-based.

John: It's something, Bridget, that it almost seems like, and I'm probably not almost, that the financial world makes it intentionally confusing. And I think that this is really one of those places, because it sounds the same. Listen, I've got a fee-only, I've got fee-based adviser, right? The implication is, listen, I want to pay a fee to get advice and not be sold something, right? That's sort of the idea that people get. But there's a really clear difference. That one word difference is really significant.

Fee-only means that the only compensation the advisor gets us from a fee; they are paid directly. That means they don't sell investments, insurance, annuities, anything else, mortgages. Fee-based sounds similar. We do charge a fee, but it's fee-based, meaning that we charge a fee, but then we also can sell investments or annuities or insurance or other places. And that's the thing that’s that really key difference: fee-only, no sales at all, fee-based, a fee, but then also the potential for pretty significant sales.

And I know, Bridget, when you were starting before you became an advisor, you had some personal experience with trying to identify how to get advice and how to find somebody who's not trying to sell you things. Share, I know you've told me the story…share what your experience was.

Bridget: I was a CPA, and I had an investment class, and I was interested in personal finance. But I knew that I could use some extra help. Like you get to a point, maybe when you've got a hundred grand, maybe two, you get to some point where you're young.

John: Hey, I need more.

Bridget: So some advice will help you.

John: Yeah.

Bridget: I went to a large outfit that everybody knows their name, and I had decent feelings toward this organization. And they said they offered free financial planning…period. You didn't have to do anything. Okay. I did have to give them all my information. Okay. So I gave them all my information and then said, "What are your recommendations?" And they gave me their recommendations. Beforehand I said, “Well, you recommend everything, not just your products, correct?" And they said, “Oh, yeah, we just recommend the best products or the best mutual funds.”

And so then when I actually got the recommendations, four out of five were their mutual funds. And then the fifth one was a bond fund that they said made 20%, which is a red flag. You want bonds to be safe. You don't want bonds to be making 20% last year. So I was like, this has no credibility. They didn't do what they said they did. Come to find out when I look at it now, it's like, they are making all their money in their fees for their mutual funds that they're recommending.

And now that I understand the industry better, I've talked to people that have worked for this place, and they will say that their advisors are only paid by salary and they don't make a commission. But that, according to everybody that works there, they just get a very low salary, and then they have everything paid out in bonuses…totally based on what they sell. And so that was my experience that really turned me off. And this actual outfit didn't specify at the time, or I didn't know to ask if it was fee-only or fee-based, but I got sucked into the free.

John: Yeah. Isn't that interesting? As I'm hearing that story, and we both know people at that firm are like, “Oh, yeah, it's a bonus, not a commission.” What's the difference in that language? And it strikes me that it's really follow the money, right? Like, where is your money going? Who's on your side? I've got an example from somebody who is a local advisor here that I've known through financial planning groups and various things.

And I've got clients that have worked with this outfit, and they would say, like, “I give people a choice. They can pay a fee or they can work on a commission basis. And everybody chooses the commission basis. We're fee-based, but nobody chooses the fee side." Well, I know that their hourly rate was really low, like, $75 an hour. I mean, less than...take your mechanic.

And then they'd say, “Well, let's give our people a choice.” And the language, because I asked a client, well, it would be “You can pay this fee or you can invest this other way, and you don't have to pay anything. The company pays me, the insurance company, the mutual fund company." Well, jeez, knowing what we know in the world, if you take your $100,000 and invest with them, he makes three or four or $5,000 for making that sale. How many hours is that at $75 an hour? So it was jeez, “I give people a choice.” I can choose this thing, but I'm fee-based, which sounds like I'm being objective.

And yet nobody knows what you're actually paying underneath the hood of those things, right? So if people knew about jeez, you could pay me $3,000 to make this investment or $75 an hour for 10 hours. Which one people choose, right? It's just follow the money sort of thing. And that's that key of where fee-based. Boy it sounds like I'm getting that fee for advice. But fee-only is really the one that people want, right?

Bridget: Exactly. And I think that the marketing people that came up with fee-based actually probably did it to confuse people. That's what I've concluded. Maybe I'm just cynical, but that's what I've concluded. And I think that fee-only is the way to go. And I think it's what consumers want, but that they struggle because just like me, they want free, too. So when anybody says this is how much it costs, or you can have it for free. Well, I don't know I think it's human nature. There's part of us that want it for free.

John: As I said follow the money before, but of course, you know that nothing is free. Logically, we know nothing is free, but it's an appeal of those things and that's what I think we need to be careful of. And that difference of if it's important to you, that you're getting, if somebody says, “Hey, you should buy this insurance or make this investment.” Well, of course, if they make more money for one than for the other, you might want to know that, right? So to be asking those--and, of course, we both operate on a fee only basis--but by finding somebody who has that fee-only approach to things, you know, that there's not going to be any sales incentive, right?

Bridget: Right.

John: You know that you eliminate that. And that is I think the one thing that if I was to say what's the one takeaway would be fee-only is very different than fee-based. Not that one…that you get better advice necessarily, but just knowing where your money is going and knowing the potential biases is really huge. And that only, as opposed to based when it comes to paying fees for your financial advice that can be a really critical thing as you make a decision on how to get advice.

Bridget: Right. And so with fee-only, we're trying to minimize conflict of interest.

John: Yup, yup. That's great.

Bridget: That's my takeaway for this. All right. So with that, let's wrap it up. I'm Bridget Sullivan Mermel. I've got a feeling financial planning practice in Chicago, Illinois. We always like to mention ACP or the Alliance of Comprehensive Planners. It's a fee-only financial planning organization that John and I both belong to, it's non-for-profit. But if you like how we talk and think about things and you're looking for an adviser in your area, you can check out

John: And last, don't forget to hit that “Subscribe” button. Help other people find information like this. And until next time, Bridget.

Bridget: Thanks, John!

At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.

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