Fee-Only???? What the heck does that mean?
When I tell people that I am a FEE-ONLY(tm) Financial Advisor, I often get a puzzled look and a question: “Fee-what?” Then I explain that a Fee-Only advisor does not sell financial products, get commissions, or any other kind of kickbacks.
“Nope, Fee-Based means that you pay a fee but your advisor still sells you products and gets commissions.”
“Ohhh, now I get it. It would be like my doctor charged me a co-pay for a visit but still got a kickback from a drug company to prescribe me certain drugs even it there were better or cheaper alternatives.”
“You got it!”
“Why aren’t financial planners more like doctors?”
“You mean a real profession?”
“Yes.”
“Well financial planning initially grew out of an entirely different business, Stockbrokers. In the old days, stockbrokers mostly bought and sold stocks for their clients and received a commission when they bought or sold stock for a client. The business was all transaction based.”
“What changed?”
“Over time more and more clients wanted advice on long-term planning issues. Fewer people have defined benefit pensions and much more of the responsibility for funding retirement has been pushed onto the individual. In addition the increasing popularity of mutual funds diminished the role of picking individual stocks. Stockbrokers found themselves providing more advice, and found that a relationship based on trust was more lucrative than one based solely on individual transactions especially when discount brokers like Charles Schwab began to undercut their commissions.”
“So what’s the problem, sounds like everyone is getting what they need.”
“Ah, but there was a dirty little secret. . . stockbrokers are not required to act in the best interests of their client as a doctor is. They repositioned themselves as Financial Advisors and sold clients mutual funds and other financial products that were often in their best interests not the client’s.”
“But wouldn’t the clients find out about that?”
“I wish that were the case, but the big brokerage houses are very clever, many of the fees they charge are hidden from the client. In fact, the client may not know how much she is paying to her broker. Some of the management fees that mutual funds charge are kick-backed to the broker. This never shows up anywhere as a fee on a client’s statement it just reduces the overall return to the investor. For example, a mutual fund that charges a 2% annual fee would reduce a 10% return to 8%. The client would think she received only an 8% return and is probably unaware of the 2% management fee (it’s disclosed in fine print on the prospectus) or that some of the management fee is being kicked-back to her broker.”
“Wow, this is a walking through a field of landmines to pick an advisor. How do I find someone who will work solely in my interest?”
“About 25 years ago a few planners who did not get commissions or kickbacks decided to form an organization called the National Association of Personal Financial Advisors, (NAPFA). Members are not allowed to sell products, get commissions, kickbacks or any other type of compensation that does not come directly from their clients. They are also required to take an oath stating they always act solely in the client’s best interest. To find a NAPFA Registered Financial Advisor who will work solely in your interest go to www.napfa.org and click on ‘Find a Planner.’”