>>>The Battle Between Fee Only and Fee Based Financial Advisors Get Payday Now
Recently, my mother called to share with me that Suze Orman's book had an incorrect definition of a fee only financial planner. My mom was wondering why Ms Orman's concept of fee only planning was so not the same as what I do. when I read Ms Orman's book, I quickly realized the issue. My mother had confused the words "fee only" with "fee based." Even my own mother, with whom I frequently talk to about my practice, had been tricked.
To be clear, "fee only" financial planners never accept commissions or compensation in the products they recommend. They are compensated only by their clients, as well as their compensation is the same regardless in the products they recommend. This compensation structure enables fee only planners to truly represent their clients instead of a coverage or brokerage firm signing their paycheck. Consequently, they are able to focus on doing what's in the absolute interest with their client without worrying about maximizing their very own compensation. Lastly, most fee-only financial planners have a very fiduciary responsibility to always do what is inside their client's best interest. Working with a fiduciary is critical.
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"Fee based" financial planners possess the power to collect fees using their clients, nonetheless they also contain the power to collect commissions through the products they sell. Thus, fee based planners may charge the client a fee for managing assets, but could also collect commissions from the mutual fund that charges the client ridiculously high fees. Additionally, fee based advisors contain the power to collect commissions from selling insurance and annuity policies which is probably not the very best fit to the client. Finally, many fee based advisors are merely held to a suitability standard, meaning they agree to do something inside a way which does not harm the client.
Clearly, there is a major difference from your fiduciary responsibility and the suitability standard. Suppose a client desires to invest in an index fund, as well as the advisor has a chance to propose two options. The first option is to recommend a fund which has a yearly expense ratio of .15 percent. The second option is always to recommend the actual same fund with the expense ratio of .65 percent, with .15 percent paying for that fund and .5 percent compensating the advisor. An advisor who is merely held for the suitability standard has the ability to recommend the second option, as it will not technically harm the client. A fiduciary, however, is obligated to recommend the initial option as a way to offer the client's best interest.
Almost you can now call themselves a monetary planner. Over 800,000 Americans currently talk about themselves as "financial advisors." This includes stockbrokers, insurance agents, and annuity salespeople. However, simply how much advising do people over these professions provide? Sure, these are able to advising clients to buy their products, however they are never compensated solely for providing sound advice. They are only paid once they come on top of a sale. Consequently, they should be forced to reference themselves as salespeople, not advisors.
Why are people not more aware with the distinction between fiduciary and suitability, and why is there a lot confusion revolving around commission vs. fee based vs. fee only? It's on purpose. Fee based is a term heavily touted by the brokerage, insurance, and annuity industries. They do everything they could to narrow the perceived gap between themselves and fee only advisors. After all, why would a consumer work by having an advisor who is financially motivated to represent the best interests of the firm in lieu of that from the client? Unfortunately, their "blur-the-line" campaign has worked. The vast most of investors are not conscious that there is a difference between fee only and fee based financial planners. In fact, most people are not even familiar with the term fee only, as a result of those 800,000 individuals calling themselves "financial advisors," only .25% (about 2,000) of financial advisors never accept product commissions.
Next time you're seeking financial advice, never be tricked. Remember there is a better strategy to have your best interests represented.
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