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Fee-Only vs. Fee-based Investment Advice

In past articles, we've discussed the confusion that many consumers of financial services have regarding terminology such as "fiduciary".  Another misconception that many people (including related professionals) struggle with is the difference between Fee-Only and fee-based advice.  These terms are frequently used interchangeably, but the differences between the two are like night and day.

In July 2005, the SEC required that brokerage firms offering fee-based advice make the following disclosure:

Your account is a brokerage account and not an advisory account.  Our interests may not always be the same as yours.  Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest.  We are paid both by you and, sometimes, by people who compensate us based on what you buy.  Therefore, our profits and our salespersons' compensation may vary by product and over time.

This stands in stark contrast to Fee-Only advisors who are required by law to place client interests before their own, and to disclose potential conflicts of interest via their Form ADV's. 

A survey by TD Ameritrade revealed that this disclosure requirement imposed on broker-offered fee-based accounts was useless in changing investor perceptions. After reading the previous disclosure, 79% of investors surveyed said that they would be less likely to go to a brokerage firm for financial advice. Obviously fee-based clients are not receiving this message.  To help alleviate the confusion, the Consumer Federation of America and National Institute for Consumer Education co-produced an informative guide on the differences between Fee-Only and fee-based advice.  

By some estimates, there are over 660,000 financial advisors in various guises in this country, but there are only 3,000 members of the National Association of Personal Financial Advisors (NAPFA), the country's leading professional association of Fee-Only financial advisors.  Objective, professional, financial advice is available - you just have to know where to find it.

Advisers paid on commission need to sell you investments to make a living, so focus instead on fee-only planners ...

                                                          - Asa Fitch, Money Magazine