Fee-Only…What it means

What does Fee-Only mean and why is it important to you?

There are three different structures advisors fit into based on how their fees are charged.  “Commission-based” means fees are charged on the transactions that are made on your behalf or in conjunction with those investments.  “Fee-based” advisors have the ability to charge commissions orcharge a fee based on the value of the assets they are investing.  “Fee-Only” advisors only charge a fee based on the value of the assets they are managing.  Why is this distinction important?

When you work with a Fee-Only advisor, the advisor’s compensation is never impacted by the investment decision, so there is no incentive to recommend one course of action over another.  This completely eliminates any conflict they may feel if their income varies based on their recommendation to you.  This is important when you consider how widely the cost of one investment differs from the cost of another.  For example, suppose you have $100,000 to invest.  Would you rather pay a charge to the broker of $6,000 (6%), or $300 to get that amount invested?  Well, that’s the choice a commission-based advisor would be facing.  If you think about it,  their perspective is exactly the opposite of yours.  For you, the lower the fee, the better…for them, not so much.  It’s not the fact that you’ll pay a commission, it’s the fact that the compensation for the advisor can be so radically different that it’s difficult to image it would not shade their perspective in some way.  So, if you do not know enough to judge the quality of your broker’s advice, you certainly don’t want them to have an incentive to sell you the wrong things.  If you use a Fee-Only advisor, you eliminate those damaging conflicts.