Fee-Only vs. Fee-Based

You have choices when selecting a financial advisor and it's easy to be confused by the terms “Fee-Only” vs. “Fee-Based”. The degree of success in achieving planning goals or investment goals may greatly depend upon if the advisor is compensated by fee, commission, or a combination of both. When conflicts of interest arise it’s generally due to an advisor receiving compensation that is in their best interest.

Fee-Only means the advisor is compensated by charging a fee for services, specifically for investment advisory or financial planning services. Registration as an Investment Advisor Representative, with a Registered Investment Advisory firm, holds the advisor accountable to a fiduciary standard of care and they are obligated to provide services in the client’s best interest. They are fiduciaries.

Fee-Based means the advisor can receive a commission from the sale of financial and / or insurance products under a less stringent suitability standard when providing services as a Broker / Insurance Agent. Additionally, they can receive a fee as an Investment Advisor Representative when providing investment advisory and / or financial planning services. In these dual capacities, Broker / Investment Advisor Representative, an advisor can alternate between fee-for-service and the sale of commissionable product.

Considerations you may have:

Questions to ask an advisor, from page 24 of Pitfalls,Traps, and Best of Practice Considerations in the 401(k) Front Lines

• Are you a fiduciary
• How are you compensated – Fee-Only, Fee-Based (fee and commission), commission
• Are you legally obligated to make all decisions in my best interest
• What licenses and registrations do you have
• What designations do you have

A 2015, Fi360 fiduciary standard survey titled Seeking Trustworthy Advice for Individual Investors highlights the following:

• 97% of investors don’t understand the differences between brokers and investment advisors
• 96% say clearer differentiation between product providers and advice providers is necessary
• 72% say the titles “advisor”, “consultant” and “planner” imply that a fiduciary relationship exits
• 84% say disclosures alone are not enough to manage conflicts of interest

* Fi360 survey results reprinted with the expressed permission of Fi360