What is the difference between Fee-Only and Fee-Based advisors?

Compensation #3Dear Mr. Market:

Last week I had lunch with an old colleague of mine. It’s always good to catch up with others in the same profession but sometimes it also truly helps you understand why so many consumers are confused. Here’s a brief background and then a summary of an actual conversation between two financial advisors:

Both financial advisors began their careers working for major wirehouse firms (think Morgan Stanley, Prudential, UBS, Smith Barney, etc…). They each then worked at Charles Schwab as part of the Retail Branch Network and Schwab Private Client (SPC) group. Thereafter, Advisor #1 (who we will call Fee-Based Advisor) left Schwab to join one of the advisors that is in their Schwab Advisor Network program.  This is a network that has made certain firms wildly successful as Charles Schwab branch representatives get compensated to vector investors and Schwab account holders to meet with advisors who pay to be in their program. Advisor #2 (who we will call Fee-Only Advisor) is not part of any network and is not affiliated with any brokerage firm, mutual fund company, or insurance company. “Fee-Only Advisor” is a Registered Investment Advisor (RIA).

Fee-Based Advisor: So…how are things out there?

Fee-Only Advisor: Good…I keep plugging away but sometimes it’s frustrating to see how undereducated the general public is about this industry.

Fee-Based Advisor: What do you mean?

Fee-Only Advisor: Well…take for example the most very basic thing that a client should first know and understand; the platform that their advisor works from. I’m working with a prospective client right now that is being pitched products by another advisor and doesn’t understand that the advisor will be paid by both him and the product!

Fee-Based Advisor: Yep…that’s frustrating. Is the guy disclosing everything to the client?

Fee-Only Advisor: I hope so but the client told me the other day that we’re both basically the same. I asked him if he knew that we are Fee-Only and not Fee-Based and that potential conflicts of interest arise in the latter platform.

Fee-Based Advisor: I hear you but I’m Fee-Only too even though I can sell insurance and annuities…I just usually choose not to.

Fee-Only Advisor: You’re actually a Fee-Based advisor….or at least the firm which you work for is. You do understand the difference, right?

Fee-Based Advisor: Well…you mean like sort of the ability to offer a flat fee or hourly just for planning type of thing? Yeah..of course.

Fee-Only Advisor: No… there is a clear difference between Fee-Only and Fee-Based. No offense… but even in your case you’re not fully aware that your own firm is Fee-Based and not Fee-Only. Fee-Only is where the only way you can and are compensated is by your client. If a mutual fund, an insurance company, or some other form of commissionable product pays you…you are NOT Fee-Only.

Fee-Based Advisor: Oh c’mon…same thing. I don’t do that stuff to my clients.

Fee-Only Advisor: Good for you but…not really (shaking his head)

It is shocking how many investors do not understand how their Financial Advisor is compensated! As indicated in the conversation above there is a significant difference between an advisor that is Fee-Only and one that is Fee-Based.

  • Fee-based – These advisors charge both a fee and collect commissions based on the products that they sell. Often these advisors will sell investments along with insurance and annuity products which pay attractive commissions to the advisor.
  • Fee-only – These advisors work under a ‘fiduciary duty’ which essentially means that by law they must do what is in each client’s best interest. There is no conflict of interest as they don’t accept any additional fees or commissions from any products, services or relationships.

While the differences appear very clear, the Financial Services industry has done a tremendous job at making a topic that should be black and white appear to be gray. Here are some simple questions that any investor should feel comfortable asking their advisor or prospective advisor to help them discover how they are compensated:

  • Are you limited to what you can sell? Can you only sell your company’s products? Are you incentivized to sell certain products?
  • Are you an employee of a corporation? If so what is your compensation structure and can I review it?
  • Ask what the total fees are associated with any product and service. Are there multiple layers?
  • Ask if they sell annuities, insurance or other insurance products. If so, what are they paid for selling those?

Fee-only vs Fee-basedIf you have any questions or would like to discuss in more detail we would encourage you
to contact us with the contact form attached to this post or you can call us directly at 888-47-GUIDE (888-474-8433). If you find yourself confused or have questions allow us to help you so you are informed and can be confident in any decisions you are looking to make.

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