PFI Disclosure 1

Though the terms sound very similar, the terms " fee-only" and "fee-based" couldn't be more different when it comes to choosing a financial adviser.

"It's no wonder people are confused," says certified financial planner John Pak of Otium Advisory Group in Los Angeles, California. He's a fee-only financial planner who's been working in the industry for the past 19 years and has helped create over 100 comprehensive plans.

When it comes to choosing a financial adviser, Pak says transparency should be a big factor. For the greatest transparency, it's best to search for a fee-only planner.

What's the difference between a fee-only and fee-based financial adviser?

A fee-based adviser may receive a fee from a client for their advice, but they will also receive a commission from accounts, policies, and more that they might sell to clients. A fee-only adviser will be paid a fixed rate for their advice only by fees paid by a client, and cannot receive any commissions or incentives from companies.

Note that certified financial planners are fiduciaries — they are required to work in your best interest — as part of their license, and are likely to be fee-only. Investment advisers and other professionals who sell policies and plans are more likely to be fee-based.

A fee-based adviser will tell you that they receive a commission. "As a planner, it's important to disclose those conflicts. If you're charging a fixed fee for a service, but then get a kickback, you have to disclose that," says Pak. But, just because they disclose it doesn't necessarily mean that a client will get the same level of impartiality they would through a fee-only financial adviser.

"For me, it's a conflict of interest," says Pak. "You have to wonder where they're coming from."

There are lots of financial products that could bring a payday for a fee-based financial planner. Pak says that the sale of insurance policies, mutual funds, and more can all bolster a fee-based adviser's income.

How can you be sure the planner you're considering is fee-only?

If you want to be sure that the adviser you're considering is a fee-only adviser, there are several ways to ask.

One of Pak's first questions for any planner you're considering working with is simply asking if they're a fiduciary, or a financial planner who is legally obligated to act in your best interest. "Ask for a signed letter that says they will always put you first," says Pak. "It's a red flag if they won't do this."

You can also ask for their compensation plan, a document that shows how they're paid. If they're fee-only, it won't include any commissions or compensation from companies. While it might sound a bit extreme to ask, this is acceptable in the world of financial planners, according to Pak. Oftentimes, a financial planner will have this on hand.

"I'm not saying that if someone doesn't do it, they're bad. But it's so easy to be honest," says Pak. With a compensation plan in hand, it's easy to see whether their income is coming from incentives, or your fees.

When it comes down to choosing a financial adviser, you'll want to choose someone who has your best interests in mind. As they're not dependent on sales or commissions to earn an income, fee-only advisers have only an obligation to you, and no other outside parties.

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