Fee-based financial advisor or fee-only financial planner – is there a difference? Many times, doctors schedule an initial consult with me because they have read that I am a fee-only planner. Or they are looking for a fee-based planner. Does it really matter that much?
Actually, yes – it matters a lot. When the brokerage industry discovered that the “F” word is what really matters in “fee-only”, the term “fee-based” was created. Throwing the “F” word (fee) into a designation suckers people who are looking for a fee-only financial advisor into a false sense of security. All you need is one of those fee-‘thingy’ advisors, and you’re all set!
But here’s what you should know: advisors who refer to themselves as “fee-based” are not required to adhere to any one set of principles when determining how to charge their clients, or even who to accept compensation from. It’s kind of like ordering a crab roll at the sushi bar without bothering to read the fine print on the menu stating that it is imitation crab.
So what’s the difference? Let’s find out.
Fee-only planners are compensated strictly by the client – nobody else. That means I, as a fee-only planner, do not:
· Sell products
· Accept commissions
· Get paid by mutual fund families (such as American Funds) for using their products
· Receive kickbacks for referring clients to another professional, such as an insurance provider, attorney, or student loan expert
· Accept awards for meeting quotas, such as selling a high volume of annuities or life insurance, etc.
Fee-based advisors, on the other hand, can be compensated by the client and in any of the above ways. Fee-based advisors are not fiduciaries; fee-only advisors are fiduciaries. The ‘F’ word is specifically used to deceive you into believing that the term “fee-based” indicates you are consulting with a Fee-Only advisor. In truth, you are simply working with an “advisor” under the same old commission-based scheme you were trying to avoid.
Here’s a tip: the best way to be sure you really are working with a fee-only advisor is to ask for their NAPFA credentials. NAPFA, the National Association of Personal Financial Advisors, is the representative organization for the majority of “true” fee-only financial planners. To qualify for NAPFA membership, the applicant must submit a financial plan for review, take an oath to be a fiduciary in all client relationships, and comply with annual continuing education requirements.
It’s not easy to be accepted for NAPFA membership (my first plan was rejected!) and not all fee-only planners join. But if your advisor is a member of NAPFA, you can be sure you’re working with a “true” fee-only financial planner. If your “fee-only” advisor is not a member, simply ask him to sign an oath to be your fiduciary in all financial transactions.
There are no rules governing the use of the description “fee-based”. Even imitation crab is regulated by the FDA! Check your advisor’s designation and make sure you get what you think you are paying for.