"Fee-Only" Versus "Fee-Based": What's the Difference?

"Fee-Only" Versus "Fee-Based": What's the Difference?

Each night before my daughter goes to bed she gets to choose two books for either me or her mom to read to her.  Lately she’s been choosing the classic “Madeline” by Ludwig Bemelmans – a lot! 

My favorite part comes in the middle when the author writes, “In the middle of one night Miss Clavel turned on her light and said, ‘Something is not right!’”  To emphasize the point, my daughter always wags her finger back and forth when we read the last line on that page, “Something is not right!”  And then we both smile and laugh together. 

I imagine these are the same words that the first fee-only planner said to himself when he was still paid on a commission basis, “Something is not right!”  He must have felt some sort of strong, internal tension when it hit him that the products he sold for the highest amount of commission were great for him and his employer but decidedly less so for his clients.    

That’s probably what led to a new model for getting paid in the financial services industry:  the fee-only model.  Under it the only form of compensation that the financial advisor or planner accepts is from his or her clients.  No fees or other forms of compensation from product sales.  No referral fees. 

Why does this matter?  Because it keeps the advisor on the same side of the table as his or her client.  Inherent conflicts of interest are kept to a minimum so that an advisor is free from opposing incentives to do what his clients pay him to do:  provide objective financial planning advice that serves his clients’ interests above all else. 

Is the same true of a “fee-based” advisor?  You may have heard the term “fee-based” and thought that it must mean the same thing as “fee-only” (most people do!).  But the two terms are not interchangeable and if you are looking to hire a financial planner, you really should know the difference between the two. 

Fee-based advisors charge a fee in addition to collecting commissions.  So the same conflicts of interest that apply to a commission-based fee structure also apply to a fee-based fee structure.  Buyer beware!

To be fair, competent and professional people work under all three financial industry compensation models:  fee-only, fee-based and commission-based.  But in my mind, the fee-only model is the most free from conflicts of interest and the one that allows the advisor or planner to be the most closely aligned with the interests of his or her clients.    

When you hire a fee-only planner, you should get the same financial advice that you would give yourself if you had the time, the interest and the expertise to do it all on your own.   Isn’t that what you want?

Greg Pierce is a Fee Only financial planner located in St. Louis, MO, who specializes in helping people make smart decisions in retirement planning, college education planning, tax planning, investments and more. 

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