“I want to warn you away from fee-based planners. The stakes are so high that you should consider fee-only planners.” -Clark Howard
The confusion of these terms has and continues to cost us a ton of money. We get hyper focused on “how much we pay” and forget about “how we pay.” How much we pay is critical. How we pay is more significant. A few necessary definitions to understand:
Commissioned-based. A model where an advisor’s compensation comes from the selling of products. It is transaction based, not service based. It is most common in the selling of load mutual funds (A, B, and C shares), annuity, and insurance products.
Fee-Only. In this model, the ONLY compensation the financial planner gets comes direct from the client. It can be in many forms such as flat fee, hourly fee, annual retainer, or a percentage of assets under management. The key is no products are sold, no commissions are charged, no 3rd party payments received from mutual funds, annuities, insurance products, etc.
Fee-Based. This is the term the brokerage industry invented to “sound like” Fee-Only to counteract the success of Fee-Only. In short, Fee-Based means the advisor is free to do commission-based OR fees, or worse, commission-based AND fees. This gives an advisor the ability to tell you, “Oh yeah, we’re fee-based too” or “oh yeah, we’re moving to a fee-based model” under the guise of being the same as Fee-Only.
Why does it matter? Well, it’s all about aligning (or misaligning) incentives. Do we want our planner aligned with us? Do we want our planner to be independent working for us, or do we want them to work for the product companies? Do we want to increase the probability of honest dealings?
- Commission-based and fee-based encourage product sales.
- Fee-Only encourages client service.
- Commission-based and fee-based result in the products being the financial plan.
- Fee-Only results in the plan being the financial plan.
- Commission-based and fee-based lead to false guarantees and one-size-fits-all solutions.
- Fee-Only leads to an honest conversation of the pros/cons of various financial options.
- Commission-based and fee-based foster “being told what we should do.”
- Fee-Only fosters collaboration, an educational process.
- Commission-based and fee-based create dependence on product companies and salesmen.
- Fee-Only creates a relationship based on independence.
- Commission-based and fee-based align our financial professionals’ interests with other parties.
- Fee-Only aligns our financial professionals’ interests with our interests.
So, why aren’t all firms working under Fee-Only at this point? The short answer is, change is hard for those product salesman. When all you have is a hammer, everything you see is a nail.
We can choose to be empowered, not falling victim. It does and will matter.
Ask direct. Get it in writing. What a firm is willing to say and what they are willing to put in writing may differ. Insist on written proof, a stated commitment to this Fee-Only principle. Eliminate as many conflicts of interest as possible.
“The correct method of payment is by fee only.” -Suze Orman
