Let me explain the difference between an advisor, fee-based financial planner and fee-only financial planner. I will explain it with an example of Chemist Vs Biased Doctor Vs Unbiased Doctor.
Suppose you are experiencing a severe headache; you go to a chemist and ask for a medicine. The chemist questions you regarding basic symptoms and gives some tablet based on whatever problems you explained it to him. It may be a simple pain killer, or an antibiotic added to it. The chemist does not exactly know what the real problem is but he gives some medicine as per your symptoms. This may or may not help you with the problem. But for the time being, you take the tablet and feel satisfied.
The chemist is like an advisor to you. It could be an insurance advisor, mutual fund advisor or stock advisor, real estate advisor etc. The advisors don’t know your goals, they just ask for the basic symptoms. (Though they already know the symptoms of you running for higher returns). Upon examining your symptoms, the advisors suggest you a financial product as per their expertise. They don’t know what your goals are, but they know what products they need to sell. They simply show you how their financial products are better in terms of getting higher returns.
Let’s move to the 2nd step.
Fee-based financial planner
The headache does not go away even after taking the tablets suggested by the chemist. You go to a doctor and the doctor examines your symptoms thoroughly. After checking you thoroughly, the doctor writes some medicines. Then, he asks you to take the medicines from the chemist whose shop is adjacent to the clinic. After all, it is your choice whether to purchase the medicine from the same chemist or some other chemist. But the chances are that the same medicine would not be available everywhere. And if you buy it from the same chemist, the doctor may get some commission from it.
This doctor is like a fee-based financial advisor who knows your goals, your assets and your liabilities. But he still suggests only those financial products which will get him a better commission.
Let’s move to the 3rd point.
Fee-only financial planner
Taking the doctor’s example in the above-mentioned case, you go to a doctor and the doctor checks your symptoms thoroughly. After checking you thoroughly, the doctor writes some medicines and does not refer from where to purchase them. The chances are that the doctor will suggest cheaper alternatives of the medicines (having same chemical compositions). He will most probably suggest a medicine which is available everywhere.
This doctor is like a fee-only financial advisor who knows your goals, your assets and your liabilities. But he suggests only those products which are best for the customer.
I am not arguing about who will get you better returns. It may be an advisor, fee-based financial planner or fee-only financial planner. I am simply trying to explain the difference in the approach which is as follows:
The advisor is ignorant about your overall financial situation just like the chemist.
The fee-based financial planner is aware about your financial situation. But he is biased just like the doctor who suggests you buy medicines from the adjacent chemist shop.
The fee-only financial planner is aware about your financial situation but is completely unbiased.
The choice is all yours – whether to select a chemist, a biased doctor or an unbiased one.