We’ve recently run into a couple of situations in which other estate planning professionals we know and with whom we’ve worked with for years did not quite understand how financial planners and advisors are compensated. In our experience, when compared to, say, a lawyer or an accountant, investment folks have a generally wider array of options with respect to compensation models. So here’s the deal:
Many advisors dedicated to the financial planning profession charge for their services by either applying an hourly fee for their work, a flat fee for a project (such as producing a financial plan), or charge a percentage fee on the investment assets which they are managing. Some shops charge a combination of fees, such as hourly rates on top of a management fee. Financial practitioners who hold a securities license can charge standard commissions on individual securities; or, if they also hold an advisory license, they could, alternatively, choose to price their services under a fee advisory agreement, which may include or exclude service-related ongoing product compensation as applicable.
Let’s talk about the terms. To us, “Fee Based” means that the advisor is compensated by their clients either in the form of a percentage of the assets under management, or an hourly or project based fee; supported by a written service contract. These advisors may also have a (usually small) number of commission based relationships. This describes us. The vast majority of our business comes from fees paid by the client, either via the accounts we are managing, or an hourly counseling relationship. A small fraction of our business comes from a handful of commission accounts.
Think of Fee Based as a hybrid compensation model, comprised of both fees and commissions, usually with a leaning toward one side or the other, varying from firm to firm. Our business is very heavy on the management fee side, and very light on the commission … and, to be clear, we never charge a fee and a commission on the same assets or account.
It is important for each client to understand what their advisor provides in the way of products, services, and what they emphasize in their practice, i.e., who they feel best prepared to serve. This should all be clearly disclosed, including how they are compensated.
To add a sliver of complexity, in recent years there has been a campaign among some in the planning community regarding “Fee Only” advisors. Well, alright. The difference between a Fee Only planner and a Fee Based planner is that a Fee Only planner cannot, under any circumstances, collect a commission from a transaction, or receive any compensation derived from the placement of a financial product, insurance policy, etc. In essence, such advisors choose to be compensated based upon fees rather than commissions, even if the client would prefer to pay transactional charges rather than management fees. Fee only advisors typically charge hourly fees and project fees, or combinations thereof, and they can charge whatever percentage management fee that a client will agree to pay.
Bottom line: when talking to an investment professional or financial planner, ask a lot of questions and be sure to clarify the terms being used to talk about what they provide, how they charge for their services, and how you stand to benefit with their approach. What “fee based” or “fee only” means to you might not be what it means to the person charging the fee.
– Chad Campbell