During a recent conversation with a client it became apparent to me that even someone working with a fee-only advisor may not fully appreciate what they have or what it means. The client had perceived that we must be getting some fees or commissions from the investments we recommend. ‘No way, really?’ he remarked. I think I was even more shocked that he believed this to be true than he was that there are no hidden fees. Rodgers & Associates is a Fee-Only Advisor.
Here are the 3 most common models of compensation according to The National Association of Personal Financial Advisors (NAPFA)*:
Fee-Only Compensation – This model minimizes conflicts of interest.
It is the required form of compensation for members of NAPFA. A Fee-Only financial advisor charges the client directly for his or her advice and/or ongoing management. No other financial reward is provided by any institution—which means that the advisor does not receive commissions on the actions they take on the clients’ behalf. Compensation is based on an hourly rate, a percent of assets managed, a flat fee, or a retainer.
Fee-Based Compensation (fee and commission) – This form is often confused with Fee-Only, but it’s not the same.
Fee-based advisors charge clients a fee for the advice delivered, but they also sometimes receive payments for products they sell or recommend. In some cases, commissions are credited towards the fee, giving the appearance of a lower-priced option, but any outside compensation lessens the advisor’s ability to keep the client’s best interests first and foremost.
Commissions – NAPFA has always maintained that an advisor who is compensated through commissions is primarily a salesperson. A client working with a commissioned sales person must always ask himself: “Is this advice truly in my best interest, or is it the most profitable product for the advisor”? Unfortunately, often the answer is the latter. In fact, a commissioned advisor usually is required to put the best interests of his employer ahead of the best interests of his client.
As you can see, it is essential to understand how your advisor is compensated for the advice you receive and if they face hidden conflicts of interest.
* NAPFA Pursuit of a Financial Advisor – Field Guide