Why I Am Not a “Fee-Based” Advisor
I was having coffee with another professional this week, and they referenced my financial planning practice as being “Fee-Based.” I surprised them by firmly denying it.
“But I thought you were only paid directly from clients?” they replied.
“Exactly,” was my answer, “and that’s why I’m definitely not Fee-Based. I’m Fee-Only!”
Why it matters
Confused? You’re not alone. I regularly get this. As a whole, consumers do not understand the difference between Fee-Based advisors and Fee-Only advisors.
Imagine if you went to your doctor and he prescribed you a medication. What if you later found out that (besides your appointment fee), the doctor also received a significant sum from the pharmaceutical company for prescribing you this drug. Does that automatically mean the drug isn’t the right thing for you? Of course not. But would it raise significant concerns about whether other treatment plans (which didn’t compensate the doctor) were better? I think it would.
Yet that’s what Fee-Based investing is. The term “Fee-Based” specifically refers to an advisor’s ability to both charge fees and receive commissions or referral kickbacks. These dual sources of compensation are what makes someone Fee-Based. The majority of people don’t understand this.
The difference between “Fee-Based” and “Fee-Only”
On the other hand, “Fee-Only” advisors only accept compensation directly from clients. They never receive commissions or payments based on particular products they help clients use. All true Fee-Only advisors* are certified by the National Association of Personal Financial Advisors (NAPFA) and sign a fiduciary oath promising to act in clients’ best interests and avoid conflicts of interest.
Fee-Based advisors also receive payments directly from clients – direct compensation may even be the vast majority of their revenue. But there exists the potential for conflicts of interest in this system.
Of course, this doesn’t mean that all Fee-Based advisors are problematic. My main concern is that most consumers don’t actually understand what the term means. The most important thing is that clients know exactly how their advisors are paid, and how much their advisors are paid.
* Unfortunately, even some advisors who call themselves “Fee-Only” are not actually Fee-Only. It is always important that you review a firm’s Form ADV Part 2, where they must disclose exactly how they are paid. Sound Stewardship’s is available here.< Back to Updates