Commentary 6/27/2013

Consumers are rapidly becoming aware of the many benefits of working with a Fee-Only financial advisor. Unfortunately, advisors are taking notice of this trend and branding themselves as Fee Only advisors when often they are not truly Fee Only.

A Fee-Only financial advisor is compensated only for his or her advice or ongoing investment management and only by the client, typically in the form of an hourly rate, as a percentage of assets under management, or a flat retainer. Fee-Only financial advisors receive no other financial reward from any institution, which means that they do not receive commissions for the actions they take on behalf of their clients. They sell only one thing - their knowledge!

Some advisors hold themselves out as "fee-only investment advisors" while taking commissions on insurance and other products, often through a separate business entity. They are not true "Fee-Only" advisors. Clearly there is an inherent conflict in charging a fee for investment advice or management and selling annuities or other products on commission. Such advisors, who misleadingly advertise that they are "Fee-Only," cannot be members of the National Association of Personal Financial Advisors (NAPFA), the premier organization for "Fee-Only" fiduciary financial planning.

Fee-Based compensation is often confused with Fee Only, but they are very different. Fee-Based advisors charge clients a fee for advice or investment management. However, they also receive payments from products sold. This is the best of both worlds - for the "Fee-Based" advisor, not the client! In some cases, commissions are credited towards the fee, giving the impression of an overall lower priced option. Nevertheless, the outside compensation invariably impairs the advisor's ability to put the client's interest first.

Investment brokers and many other investment advisors are compensated from commissions on products sold. Clients looking for unbiased advice can never be sure whether the investment being recommended is truly in their best interest or is the most profitable product for the advisor. Consumers should be very wary about engaging an advisor who is compensated solely by commissions. Many may be well intended; however, many may not have the best interest of the client at heart.

A true Fee-Only independent registered financial advisor and investment manager is the only advisor who must always put the client's interest first. The terminology is confusing. However, it is critical for the consumer to understand the distinctions. The advisor’s Form ADV, Part II (also referred to as ”the firm’s brochure”) is required by the SEC for all Registered Investment Advisors and is a good, in-depth source of information that, among other things, spells out how an advisor is paid. This is also a good source for comparing different advisors’ credentials.