Fee-Only Financial Advisors
Fee-Only advisors receive no compensation from selling commission-based products; any compensation they receive comes from clients. That compensation structure helps ensure that the advisor is working strictly on the client’s behalf and isn’t inclined to favor products that may not be in the client’s best interest.
Fee-Only Registered Investment Advisors (RIA) have a fiduciary responsibility- the highest legal duty-to always put the client’s best interests first, even if it may not be the most profitable to the advisor.
Fee-Based Financial Advisors
Fee-Based advisors use a compensation structure that is a hybrid of commissions and client fees. They accept compensation from clients as well as commissions from third parties, such as mutual funds or insurance companies, every time they sell their products. Therein lies the potential conflict of interest. While you may pay a fee-based planner less outright compensation than what you would pay a fee-only advisor, fee-based advisors can earn commissions by putting you in certain products, and the commissions they earn on certain investments may be higher than others. Thus, the advisor may have a financial incentive to favor on product over another.
Most fee-based planners work under a suitability standard rather than a fiduciary duty. Whereas advisors who have a fiduciary duty should be able to demonstrate they’ve chosen the best products for their clients, advisors operating under the suitability standard should make recommendations that are suitable (though maybe not the best) for their clients.
Also, some fee-based advisors aren’t financial planners, but investment advisors. Financial planners thoroughly assess your financial background before constructing complete financial plans that may include insurance, estate-planning, and tax issues. Investment advisors are primarily in the business of providing advice on investing in specific stocks, bonds, mutual funds or exchange traded funds. Further, they may only be able to recommend that you invest in a narrow range of products they have the ability to sell rather than provide sound, high-level investment advice.
* From Morningstar.com