Yesterday, my mother called to inform me that Suze Orman’s book had an incorrect definition of what a fee-only planner is. My mom was wondering why Mrs. Orman’s definition of fee-only was so different from what I do. When I read Mrs. Orman’s book, I quickly realized the issue. My mother had confused the phrase “fee-only” with “fee-based.” Even my own mother, who I speak to about my practice every week, had been tricked.
To be clear, “fee-only” financial planners CANNOT accept commissions or compensation from the products they recommend to clients. We are compensated only by our clients, and our compensation is the same regardless of the products we recommend. This allows us to truly represent our clients, not an insurance or brokerage firm that signs our paycheck. Consequently, we can focus on doing what is in the absolute best interest of our client without worrying about maximizing our own compensation. Lastly, fee-only financial planners have a fiduciary responsibility to always do what is in the client’s best interest. Working with a fiduciary is critical.
“Fee-based” financial planners may have the ability to collect fees from their clients, but they still 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 then may also collect commissions from a mutual fund that charges the owner of the fund ridiculously high fees. Additionally, fee-based advisors have the ability to collect commissions on insurance and annuities policies which are sometimes not in the client’s best interest. Fee-based advisors are only held to a suitability standard, meaning they agree to act in a way that does not harm their clients. Clearly, there is a big difference between the fiduciary and suitability responsibilities.
Why is there so much confusion revolving around these two ways of representing clients? It’s on purpose. “Fee-based” is a term heavily touted by 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 their clients? 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. In fact, most consumers are not even familiar with the term “fee-only,” because only .25% of financial advisors never accept product commissions.
Next time your seeking financial advice, don’t be tricked. Remember there is a better way to obtain representation for your best interests.