The financial advice industry can’t seem to avoid being confusing.
Take the terms “Fee-Only” and “Fee-Based”.
The only compensation “Fee-Only” advisors receive is from their clients. Fees are to be transparent. There aren’t supposed to be any forms of compensation from other third parties, especially compensation that’s directly related to product sales (i.e., commissions).
“Fee-Based”, on the other hand, means that compensation to the advisor can be from clients or third parties, typically a combination of the two. Some advisors like this form of compensation because they have more control over whether the products they recommend are implemented. For example, if the advisor recommends a term insurance policy, they can sell the specific policy they’re recommending. The advisor may choose to reduce the amount the client pays directly because they are also receiving the commission to get to the total compensation they need for their advice and service. However, some clients still have the concern that the product compensation might influence the advisor’s recommendation.
Use of these terms has become common, at least in the advisory community. But do consumers know what advisors mean by these terms? I talk with prospects from time to time who say they’re looking for a “fee based” advisor. I have to ask them if that means they prefer someone who takes commissions to help reduce the cost of advice, or if they’re using the term “fee-based” to describe what they really want, which is “fee-only”. Typically, it’s the latter.
To make it more confusing, some advisors even use the terms as if they mean “fee-only”. If you’re looking for a true fee-only advisor, ask the following questions:
- How are you compensated?
- If you accept commissions, where do they come from?
- Do you accept referral fees?
These are the first three questions in NAPFA’s list of ten questions to use when looking for an advisor, found here. If you’re looking for a fee-only advisor, make sure that compensation for your financial plan comes only from you. True “fee-only” advisors do not accept commissions, period.