Why is Being Fee-Only Important?

Why is Being Fee-Only Important?

You are at the doctor for chronic issue that is uncomfortable. After hearing about your symptoms, looking you over and diagnosing you she writes you a prescription. Problem is, the doctor receives payments from the company that makes the medicine prescribed to you and there was a cheaper, generic option that is known to be just as effective. A similar scenario occurs in the financial advice industry where some brokers/advisors receive more money for selling one product over another.

Ideally, you want a doctor and a advisor/financial planner who is providing advice that is in your best interest and is not influenced by monetary conflicts of interest. A FEE-ONLY financial advisor does not receive revenue sharing from fund companies or any other source. This allows them to provide unbiased, conflict-free advice to clients.

First, let me provide some background information on what has to happen in order to provide financial planning services. In order to provide financial planning services, planners or their firms must be registered with either their state or the SEC as a Registered Investment Advisor (RIA). Regulators want all financial planning advice to be objective so, they require anyone providing financial planning services must be registered as an RIA and is held to a Fiduciary Standard for those services.

This means that I am required to act solely in the best interest of my clients, even if that interest is in conflict with my own financial interest. RIAs must disclose any conflict of interest, or any potential conflict of interest, to our clients before and throughout a business engagement.

Fee-Only Advisors

In order to use the term, fee-only, a RIA cannot accept any compensation that does not come directly from the client for services provided. This means no referral fees from third parties, no upfront, back-end, or 12b-1(mutual fund marketing) fees, no insurance or annuity commissions, no award trips, or any other material or significant incentives.

It also means that RIAs who describe themselves as fee-only must adhere to this standard for all types of accounts and provided services. For instance, you can’t be fee-only for an IRA and collect commissions on a joint account for the same client.

Fee-Based or Dual Registered Advisors

When advisors describe themselves as fee-based, it means that some of their compensation comes directly from their clients as fees, but not all. They still sell financial products to their clients for commission or accept referral fees to refer their clients to other professionals.

Many RIAs are also registered as a broker or registered representative with a broker-dealer. These dual registered advisors are held to a fiduciary standard while providing financial planning services, but once they switch hats to being an employee of their broker-dealer, they are only held to the much lower “sales suitability” standard of conduct.

A typical scenario is when a dual registered advisor prepares a financial plan for a client as a RIA fiduciary, but when it comes to discussing which investments to use, the advisor becomes a salesperson for their broker. Broker-dealers must disclose that they and their salespeople are not necessarily acting in your best interest. In fact, the SEC requires them to add the following disclosure to your client agreement:

“Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you including the extent of our obligations to disclose conflicts of interest and to act in your best interest [these are much more limited than the fiduciary standard described above]. We are paid both by you and, sometimes by people who compensate us based on what you buy. Therefore, our profits and our salespersons’ compensation may vary by product and over time.”

In fact, when advisors are functioning as salespeople, they are required to act in the best interest of their employer, not yours.

Three Ways to Distinguish Fee-Based From True Fee-Only Advisors

  • If the client agreement has the SEC disclaimer language above, you are not working with a fee-only advisor.
  • If the advisor’s business card or web site has the term, “securities offered by XYZ, a broker-dealer”, you are not working with a fee-only advisor.
  •  If the advisor is a broker and a CFP® they have to designate their form of compensation as fees and commissions on their CFP® profile.
  • If they sell insurance.


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