Thursday, August 6, 2009

What is the Difference Between Fee Only and Fee Based Financial Advisors?

Fee only financial planners never accept commissions or compensation from the products they recommend. They are compensated only by their clients and their compensation is the same regardless of the products they recommend. This compensation structure enables fee only planners to truly represent their clients rather than an insurance or brokerage firm signing their paycheck. Consequently, they can focus on doing what is in the absolute best interest of their client without worrying about maximizing their own compensation. Finally, most fee only financial planners have a fiduciary responsibility to always do what is in their client's best interest. Working with a fiduciary is critical.

Fee based financial planners have the ability to collect fees from their clients, but they also have the ability to collect commissions from the products they sell. Thus, fee based planners may charge the client a fee for managing assets, but may also collect commissions from a mutual fund that charges the client ridiculously high fees. Additionally, fee based advisors have the ability to collect commissions from selling insurance and annuity policies which may not be the best fit for the client. Finally, many fee based advisors are only held to a suitability standard, meaning they agree to act in a way which does not harm the client.

Almost anyone can call themselves a financial planner. Over 800,000 Americans currently refer to themselves as “financial advisors.” This includes stockbrokers, insurance agents, and annuity salespeople. However, how much advising do people in these professions provide? Sure, they are capable of advising clients to purchase their products, but they are never compensated solely for providing sound advice; they are only paid when they make a sale. Consequently, these individuals should be forced to refer to themselves as salespeople, not advisors.

Why are people not more aware of the distinction between fiduciary and suitability, and why is there so much confusion revolving around commission vs. fee based vs. fee only? It's on purpose. Fee based is a term heavily touted by the brokerage, insurance, and annuity industries. They do everything they can to narrow the perceived gap between themselves and fee only advisors. After all, why would a consumer work with an advisor who is financially motivated to represent the best interests of their firm rather than that of the client? Unfortunately, their "blur-the-line" campaign has worked. The vast majority of investors are not even aware that there is a difference between fee only and fee based financial planners. In fact, most consumers are not even familiar with the term fee only, because of those 800,000 individuals calling themselves “financial advisors,” only .25% (about 2,000) of financial advisors are members of the National Association of Personal Financial Advisors (NAPFA) and never accept product commissions.

1 comment:

Aimee said...

Good post. Nice information has been given. A clear information about the different financial advisors has been given. Thanks for sharing this information. The post seems to be very informative one.

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