What Is a Fee Based Financial Advisor -- And Do I Need One?

You have a lot of choices when it comes to selecting  a new financial planner. You can go with a small firm, a big company, an advisor with investment experience, or a  young broker.One term you'll probably see a lot is fee based financial advisor.

So what is a fee based financial advisor? Also called a fee only financial advisor, this kind of advisor  is compensated only by a fee that stays the same regardless of the success or failure of any investments made. Generally, fee only advisors are compensated based on the amount of assets under their management or are paid a flat fee.

Performance based  financial advisors could be compensated based on the returns generated by the asset they handle. So if you invested $10,000 through your financial advisor, and your ROI is $2,000 over the first year, the advisor might take ten percent of that increase. Many stock brokers and insurance reps are paid acommission by selling investment and insurance products to you.

We urge you to understand how a financial advisor will be compensated before you start work with them and focus on a fee based financial advisor.

Why? Because unless you're paying a financial advisor a percentage of assets or a flat fee, it may be difficult to determine that he or she always has your desires or best interests at heart. If your investment advisor has a personal stake in the outcome of a given investment, you may not be sure that he or she is making unbiased decisions. You’re likely to want an advisor who place your interests first and wants you to succeed -- not one who has dollar signs in his eyes every time he invests your money.

Bottom line: A fee only financial advisor generally accepts no commissions, finder's fees, or rebates of any kind. Because of this, you’re likely to receive advice based on your needs and not those of your advisor or his firm.