Do you know the difference between a fee-based advisor and an independent, fee-only advisor?
This is a very important question as how your advisor is compensated may create conflicts of interest, which can lead to significant financial consequences for you and your family. As brokers and insurance agents have changed their job titles in recent years to “advisors” and have replaced commissions with fees as their primary method of compensation, such conflicts of interests are not as easy to see today but are still there if you know where to look. Such conflicts are also not hard to find if you know what questions to ask.
If you are looking for most objective financial advice possible without conflicts of interest, consider the following differences between a fee-based advisor and a truly independent, fee-only advisor:
1. Fee-based advisors can wear many hats by acting as advisors, brokers and insurance agents. Because a fee-based advisor can wear more than one hat, a significant conflict of interest is created as it sometimes pays more to wear the broker, insurance agent or advisor hat. For example, by wearing the broker or insurance agent hat, the advisor may also receive fees and commissions from financial products such as mutual funds and annuities held in your accounts in addition to the fees you may be paying the advisor. Any time an advisor can wear either a broker or insurance hat, a financial incentive is created to sell financial products with high commissions and fees. Because you may not know what hat the advisor is wearing and most importantly when, this arrangement is anything but simple, conflict free or transparent.
2. In sharp contrast to fee-based advisors, a truly independent, fee-only advisor wears only one hat, that being the advisor for the client. Unlike the fee-based advisor, the fee-only advisor does not work as a salesperson for a bank, brokerage firm, mutual fund or insurance company. As a result, these types of advisors do not receive fees or commissions from financial products whatsoever. To eliminate conflicts of interests, fee-only advisors serve only as advisors for their clients and have no broker or insurance hats to wear. In addition, fee-only advisors are only paid by their clients, have a fiduciary duty to put their clients’ interests first for all of their accounts, not just their retirement accounts. It’s that simple.
Regardless of how many letters an advisor has after his or her name (e.g. CFP, CFA, CPA, etc.), unless you know if the advisor is a fee-based advisor or a truly independent, fee-only advisor, you’ll never know which hat (or hats) the advisor is wearing and when. As a result, those currently using a fee-based advisor may be surprised to discover that the advice they receive may not be objective in nature or in their best interest.
If you are not sure which hat an advisor is wearing or want to know more about the benefits of a truly independent, fee-only advisor, there are some questions you should ask and educational websites you can visit. For this information and more, simply give us a call at 713-850-8900 and we’ll be happy to provide it.