Fee-Only vs Fee-Based | What’s the Difference?
Posted Jan 10, 2020
As I mentioned in a previous post, the financial services industry can be complex and it can be hard to understand what type of financial “advisor” that you might be talking with. One area that has become particularly bastardized is around the term fee-based. As the fee-only financial planning and investment management movement has started gaining traction and a lot of positive press, the brokerage and life insurance industries have responded with a new confusing term called fee-based. Fee-based is confusing because it sounds similar to fee-only and the client is likely to think of them as the same thing… and that’s the point. The CFP Board actually restricts the use of fee-based for CERTIFIED FINANCIAL PLANNER™ Professionals and requires the CFP® Pro to use the more accurate description “fees and commissions.”1 Most advisors these days work under the fees and commissions model and will not relinquish their securities and insurance licenses that allow them to accept commissions because these commissions can be so highly lucrative.
The selling of commissionable products like permanent life insurance, annuities, REITs, front-end load mutual funds, and unit investment trusts can pay massive commissions. This is where the rub is and how a major conflict of interest enters into the relationship with a “fee-based” advisor. If you are meeting with an advisor and he’s making a recommendation to you, you are probably assuming that he’s working in your best interest and that would be a pretty reasonable expectation. However, a fee-based advisor that makes a recommendation for a commissionable investment or insurance product just has to meet the very easy to clear suitability standard.
Commissionable products introduce all kinds of conflicts of interest in a client/advisor relationship. Now I’m not saying all commissions are bad or that advisor’s who make commissions are bad, it’s just that they introduce a major conflict of interest that influences recommendations. When life insurance policies can pay an agent the entire first year’s premiums or when annuities and REITS can pay up to 10% in commissions, it’s easy to see how commissions create a natural conflict of interest because the advisor will get paid differently based not just off what kind of product they recommend but also the company that manufactures the product. An advisor should be fully disclosing the conflicts of interest in their business and recommendations. They should also be telling you that they are working as a broker and not as a fiduciary when providing certain recommendations… but this doesn’t actually happen and it’s disappointing.
As a fee-only planner, I don’t sell insurance or annuities and cannot accept commissions, referral fees, kickbacks, etc. My clients pay me directly for ongoing financial planning advice and investment management, so I get paid the same amount no matter what recommendations I make or investments I use and this allows me to best serve the needs of my clients. To be a fee-only financial planner, the advisor has to work for a fee-only Registered Investment Adviser (RIA), like Thayer Financial, L.L.C., that receives no sales-related compensation and also has no related parties that receive sales-related compensation.
So imagine meeting with your financial advisor and be able to completely relax knowing that the person you are meeting with is legally a fiduciary and has zero incentive to steer you wrong. You aren’t going to get bombarded with insurance proposals, annuity sales, and non-traded REITS that pay the advisor obscene amounts of money. The advisor’s only goal is to help you achieve your own financial goals knowing that you are paying for their advice not for products. That’s what you get with a fee-only advisor… an actual adviser and not a salesman.
I’m a proud member of National Association of Personal Financial Advisors (NAPFA), the country’s leading professional association of Fee-Only financial advisors—highly trained professionals who are committed to working in the best interests of those they serve. I’m also a member of the XY Planning Network, the leading organization of fee-only financial advisors who are focused on working with Generation X and Generation Y clients.
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