Is That Advisor Really Fee-Only?

A few months ago, I was in a coaching session with a woman who was very confused about how her advisor gets paid. Her advisor worked for a major brokerage firm and insisted that he was “fee-only.” She felt uncertain if this was the truth so I asked to look at one of her statements.

As I reviewed her statement, I noticed that her advisor was paid a fee from the mutual funds in her portfolio called a 12b-1 fee. Since he is receiving fees from the mutual fund company, he is not “fee-only.” More than likely he is a “fee-based” advisor. Her gut instincts were spot on.

She asked what the difference is between the two. I told her that a “fee-only” financial advisor is an advisor whose sole compensation comes from giving advice. If the advisor can get paid for advice and get paid a commission then they are “fee-based.” The advantage to having a “fee-only” advisor is that the focus is on the advice instead of selling a product. There’s less conflict of interest and all solutions, not just the ones the advisors can sell, are offered.

Understanding how an advisor gets paid is tough. It honestly took me about two years before I fully understood the different ways financial professionals are paid. I can only imagine how difficult it must be for someone who is not advisor.

A few years ago, the CFP board created a website where people can search for advisors based on certain preferences – fee-only being one of them.  After a while, the CFP Board noticed that advisors who were claiming to be fee-only actually were not and started cracking down on the use of the word “fee–only.” The strictest standard of “fee-only” can be found with National Association of Personal Financial Advisors  (NAPFA). NAPFA is a professional organization for advisors who are strictly “fee-only.” Below are a few of their standards for membership:

#1.  The advisor cannot receive money dependent on selling a product like an annuity, stock or mutual fund.

#2. The advisor cannot receive money for implementing planning recommendations. That includes commissions, rebates, bonuses and 12b-1 fees (annual marketing or distribution fees on mutual funds).

#3. An advisor can’t own interest in or work at a company that receives the type of money mentioned in #1 and #2.

I told the employee to consider using this as a checklist to help vet advisors. The fewer conflicts of interest an advisor has, the more likely their focus will be on providing you with quality advice as opposed to selling you investment products. You can also search for an advisor on the  NAPFA website. Finally, books like our CEO’s recently published What Your Financial Advisor Isn’t Telling You, provide guidance on finding fee-only advisors.

 

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