Fee-only and Fee-based may sound similar, but they are in fact very different.
Fee-only advisers conduct their business under a “fiduciary duty,” which means by law; they must have their clients’ best interest at heart. Fee-only advisors have “no inherent conflicts of interest,” they don’t accept fees or compensation based on product sales, and they generally provide more comprehensive advice. Fee-only advisers can charge a one-time or ongoing fee, depending on the types of services they provide. The fees may be hourly, flat or based upon a percentage of assets under management.
Fee-based advisers may charge both fees and commissions based on the products they sell. Most fee-based advisers hold licenses that allow them to sell investments or insurance products for a commission. Because fee-based or commission-based advisers generally don’t fully disclose the method of compensation they are receiving, it can confuse clients who may not fully understand when their fee-based advisers are working for commissions. There is an inherent “moral hazard” with commission-based advisers. Instead of customers being “advised” on what is in their best interest, are they being “sold” the products that will pay the highest commissions to the adviser?