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Shouldn’t “fee only” mean you only get paid by fees?

October 16, 2013

If you want trustworthy, objective financial advice, you should be willing to pay for it. That’s the general appeal of the “fee only” financial advisor.

When your advisor’s only source of income is fees collected from you and other investors, his only incentive is to dispense the best possible advice for each client. But an advisor whose income comes from other sources will naturally be biased to favor those sources, even subconsciously. Shouldn't "fee only" mean you only get paid by fees?

So you as an investor are well-advised to seek a fee-only advisor.

Unfortunately, not everyone who calls himself “fee only” is, in fact, fee-only. (No wonder nearly half of Americans in a recent poll say they don’t know whom to trust.) And the Certified Financial Planner Board finally decided to crack down.

Who’s paying your advisor?

Most financial advisors are employed by, or under contract with, firms that sell financial products—like investment brokers and insurance companies. Their advice is bound to be biased toward the products they sell.  After all, they have to make money somehow.

But even many “fee-based” Certified Financial Planners (CFPs) have undisclosed sources of income—and conflicts of interest that affect their advice. These undisclosed income sources include:

  • Commissions charged by a parent company, like a bank or brokerage. The CFB Board recently clarified that an advisor can’t call himself “fee only” if any related party receives commissions.
  • An ownership stake in a broker-dealer. The CFB Board recently sanctioned its own former chairman for failure to disclose a 1% stake while calling himself “fee-only.”
  • Recruitment compensation paid to advisors moving from one company to another. The Federal Industry Regulatory Authority (FINRA) is pressing a new rule forcing advisors to disclose such bonuses.
  • Managing capital accounts.

I was chatting recently with a CFP who claimed to be a fee-only advisor. But he also then stated that he manages capital accounts. How can this individual be truly objective? If his managed accounts have large holdings in a certain security, he’s more likely to recommend that security to you and others—even if it isn’t the ideal fit for your portfolio.

Subtle conflicts of interest

The CFB Board is cracking downI don’t mean to suggest CFBs who receive these other forms of compensation are unscrupulous. On the contrary, I believe they’re diligent, hard-working and want only the best for their clients.

But I do believe they should disclose any other compensation they receive beside client fees, and have no business calling themselves “fee-only” if they receive any.

Why? Because any compensation a financial advisor receives creates a subtle conflict of interest that’s bound to influence his recommendations. For trustworthy, objective financial advice, you need an advisor who is truly compensated only with the fees you pay him. This advisor sells no products, has no alliances with financial services firms, and manages no capital accounts that can create conflicts of interest.

A true fee-only advisor

I founded LifeAuditors to be exactly this kind of advisor.

With LifeAuditors you’ll get straightforward recommendations based exclusively on what’s best for your financial situation. It might be contrary to everything your friends have ever told you, but it won’t be biased by any opportunity for financial gain on my part.

You can trust my advice, because you’re paying me for it. And—at least until we’ve worked together—I am not your friend.

Paul Katz doesn’t care if you like him. As the founder of LifeAuditors, he stays objective to help you reach your financial goals, and sells no financial products of any kind. His advice is completely impartial.

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Image credits: www.financialplannerworld.com

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