What is a Fee Only Financial Advisor?

A fee only financial advisor does not receive any commission from clients and instead charges a fixed rate. The main advantage of this is that it reduces the incentive for the advisor to suggest measures that have excessive risk purely for the sake of higher potential income. It can also reduce conflicts of interest. One downside of a fee only financial advisor is that they may prove more expensive, particularly in terms of up-front costs.

An advisor who is paid on a commission basis by their client will be motivated to give advice to maximize returns. While this can be appropriate for some clients, it can mean advice is too risky for other clients. It can also increase the possibility of the client losing money. It could also mean taking a short-term approach to investing when a medium- or long-term approach is more appropriate.

A fee only financial advisor will also not be subject to the motivations of some advisors who receive commissions from financial companies for selling their products. This can cause a conflict of interest. The commissions could also mean an advisor is tempted to advise more frequent buying and selling by the client, as this increases the frequency with which they earn a commission.

It is still relatively rare to find a genuine fee only financial advisor. The National Association of Personal Financial Advisors, which is the main organization dedicated to fee only advisors, has around 800 members. Many advisors will use phrases such as "fee based," which simply means they receive both fees and commissions.

The major drawback of using a fee only financial advisor is that the costs can be prohibitive. Even in cases where the fee works out cheaper than the commission option, it may be less attractive if it has to be paid in advance as a lump sum rather than deducted as commission from future trades. The fee payment schedule will affect the importance of the differences between the two systems.

A fee only system may also risk the possibility of an advisor not being ambitious enough. In theory, they may have less motivation to give advice that proves profitable for the client and could instead be overly cautious. There is also no guarantee that the advisor won't still make decisions that are subject to personal bias, such as for example in favor of a particular company or a particular type of investment.