Your Advisory Firm: Fee Only or Not?

Now, here’s something to chew on. The promotion of a financial Advisory Firm advertises, “Fee Only.” “This is good,” you think to yourself. “The company doesn’t accept commissions or compensation based on product sales.” In other words, they adhere to the “Fee Only” definition below from Investment News.

"Under CFP rules, investment advisers can use the fee-only designation only if they charge fees for advice and are not affiliated with any financial services business that charges commissions - even they don't collect commissions themselves." The initials CFP refer to certified financial planners.

Helpful Definitions

Fee-only advisors don’t accept fees or compensation based on product sales. They can charge a one-time or ongoing fee, depending on the types of services they provide. The fees may be hourly, flat or based upon a percentage of assets under management.

Fee-based advisors may charge both fees and commissions based on the products they sell.

But, like a wolf in sheep’s clothing, the “Fee-Only” advisory firm may well be engaged in false advertising. This is why.

Michael E. Kitces, who writes “Nerd’s Eye View,” reports that nine out of ten top advisory firms from a CNBC survey relate they are “fee only,” but are not. Rather, they partake in insurance commissions via running an insurance agency or refer clients to one that participates in compensation sharing with them. This duel personality of sorts was discovered because the firms that reported themselves as “fee-only” unbelievably gave themselves away on a standardized form for the government. It is called the ADV and known by its initials. This is a standard document that investment advisors use to register with the Securities and Exchange Commission (SEC) and state securities authorities. It covers two areas, I. Past disciplinary actions, if any, and 2. The firms or advisor’s profile including fees.

If the applicant claims to be a “fee-only” and is not, a conflict of interest is revealed. Further, the firm is either careless or deceitful. Either is not good news for a client who has to rely on trust based on honesty when dealing with their financial professional.

My take on this is that an advisory firm should not be selling any product for which they receive commission if they say they are “fee-only.” Further, the industry should do more to educate consumers on the difference between “Fee-Only” and “Fee-Based.” And, last, but not least, consumers need to sound off to protect their own best financial interests.