August 15, 2022

Family Finances

Fee-Only Advisor vs Fee-Based Advisor? What’s the difference?

As if the financial industry weren’t complicated enough, there are fee-only investment advisors and fee-based advisors — and a Registered Investment Advisor firm can be either. As the wording implies, fee-only investment advisors like Rockbridge receive NO commissions or any other forms of compensation from ANY outside sources. At the other end of the spectrum, commissioned brokers receive most or all of their revenue from the companies whose products they buy and sell.

Fee-based advisors fall into a gray area. They receive most of their revenue from client fees, but they can also receive portions of their revenue from outside sources. A common example is investment advisors who also are insurance agents, receiving fees from their clients as well as commissions from selling insurance policies, annuities, mutual funds loaded with fees, etc.  Most importantly, fee-based advisors are not required by law to act in the best interest of their clients.  They are held to a much more lenient standard, knows as a “suitability standard”, meaning, as long as they provide advice that’s suitable for their clients they can’t get in any trouble.  Fee-only advisors, like Rockbridge, are held to a much more stringent standard known as a “Fiduciary Standard”, meaning we are required by law to act in your best interest.

Imagine if you went to a doctor with a health issue.  The doctor diagnoses the condition as life threatening.  There are two known treatment regimens for this condition, one consists of a regimen that will cure the condition forever (but means the doctor won’t receive much compensation for it), and the other consists of taking multiple prescriptions for the rest of your life to treat the condition, but means the doctor will receive large commissions for recommending the prescriptions.  If the doctor was a fee-based advisor, he would only be required to provide advice that’s suitable for you, and he may be inclined to recommend the lifetime treatment and receive kickbacks from the drug companies for the rest of your life.  This is why suitable advice ≠ advice that’s in your best interest, and why fee-only advisors  ≠ fee-based advisors.  A fee-only advisor is required by law to act in the best interest of the client.  Period.  

Unfortunately, Syracuse and all of Central New York is littered with fee-based advisors that have slick sales pitches about why the fact that they aren’t fee-only doesn’t matter, and how they always act in the best interest of their clients because they are “nice guys”.  There are plenty of advisors, doctors, attorneys, you name it, that are in jail even though they are nice guys.  If the advisor isn’t required by law to act in your best interest, then why bother?

Personally, we prefer to keep things clean and simple. If an insurance policy or any other wealth management strategy is in your best interest, we provide you with our unbiased, fee-only advice on how to proceed. We collaborate with our team of Certified Financial Planners (CFP’s) to implement the advice. With this arrangement, you have the peace of mind in knowing we have no conflicting incentives.  

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