Fee-only vs. fee-based: what’s the difference?

A fee-only advisor is paid only by the client and takes no commissions or other pay tied to selling a product. A fee-based advisor charges fees and can also earn commissions, trailing fees, or other sales compensation, so the two terms describe different things.

One word apart, and not the same thing. I run a fee-only firm, Harvest Lane Investment Partners in Sandy, Utah, so I have a side in this. The definitions below are not mine. They belong to the groups that police them.

What does fee-only mean?

It means the client is the only source of the advisor’s pay. NAPFA, a membership association of fee-only advisors, defines a fee-only advisor as one compensated solely by the client, with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product.

The CFP Board’s Code and Standards draw the same line. A CFP professional may say fee-only only if neither they nor their firm receives any sales-related compensation, and no related party receives it in connection with the services they provide to clients.

What does fee-based mean?

Fees plus something else. The CFP Board treats "fee-based" as equivalent to "commission and fee": the compensation method of someone who receives both fees and sales-related compensation. The Board does not ban the term, but a CFP professional who uses it must state plainly that they earn both fees and commissions, or that they are not fee-only. Sales-related compensation includes commissions, trailing commissions, 12b-1 fees, spreads, transaction fees, revenue sharing, and referral fees.

Often a fee-based advisor is also a registered representative of a broker-dealer and can be paid either way depending on the account. Firms registered as both are dual registrants. The SEC’s Form CRS materials at Investor.gov/CRS describe the pay difference: a broker is typically paid a commission or markup on each trade, an adviser an ongoing fee based on the value of your account.

None of that makes a fee-based advisor dishonest. You have to work out, on each recommendation, which way they are being paid.

Why does the difference matter?

Because pay shapes advice, and the regulators say so in writing. Item 5.E of the SEC’s Form ADV Part 2A instructions requires an adviser whose firm or people accept compensation for selling securities or other investment products, including service fees from mutual funds, to disclose it. The adviser must also explain that the practice is a conflict of interest, one that gives them an incentive to recommend products based on the pay received rather than on the client’s needs, and say whether the advisory fee is reduced to offset it.

That is the SEC describing, in its own form, the compensation a fee-based advisor takes. Its 2019 fiduciary interpretation adds that an adviser’s duty of loyalty requires it to eliminate, or fully and fairly disclose, every conflict that might incline it, consciously or unconsciously, to give advice that is not disinterested, and that disclosure alone is not always enough.

A fee-only advisor has removed one whole category of conflict rather than disclosing it. Others remain (an advisor paid on assets has a reason to want your assets). Fee-only also says nothing about how much you pay all in.

How do I find out which one my advisor is?

Not from the label. Four checks, all free.

1. Form ADV Part 2A, Item 5. Nearly every registered adviser’s brochure, SEC or state, is on the SEC’s IAPD site at adviserinfo.sec.gov. If Item 5.E says the firm or its people accept commissions, 12b-1 fees, or other mutual fund sales or service fees, the firm is fee-based, whatever it calls itself.
2. Part 2B, Item 4. The brochure supplement must disclose when an individual advisor receives commissions or other compensation from product sales, including as a registered representative of a broker-dealer. Ask for it. SEC-registered firms hand it to clients rather than posting it on IAPD.
3. FINRA BrokerCheck. FINRA’s BrokerCheck FAQ says it is common for a financial professional to act as both a broker and an investment adviser, so BrokerCheck includes advisers and links to IAPD. If yours shows a broker registration, check which duty applies. FINRA’s advice is to find out which role they are filling, because it changes what you get and what it costs.
4. Form CRS, if they have one. SEC-registered advisers and brokers give retail clients a relationship summary covering how the firm makes money and its conflicts, including pay from third parties for recommending certain investments. For a state-registered adviser such as Harvest Lane, the Form ADV brochure is the document to read.

Then ask one question: does any part of your pay, or your firm’s, depend on what I buy? A fee-only advisor answers no without a pause.

Harvest Lane is fee-only. Harvest Lane Investment Partners LLC is an investment adviser registered with the Utah Division of Securities, firm CRD 340042, and our fees are tiered, as described in Form ADV Part 2A. Compensated solely by client advisory fees. No commissions, no product sales.

If your advisor’s Item 5.E runs longer than you expected, that is the moment for a second opinion. Send me the statements. It costs you nothing and commits you to nothing.