Choosing a Financial Advisor: Is Fee-Only the Only Option?

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Choosing a Financial Advisor: Is Fee-Only the Only Option?

Posted by ObliviousInvestor 1180 days ago, popular 1179 days ago (http://www.obliviousinvestor.com)
Category: Personal Finance | Tags: commission fee financial advisor

A discussion of the pros and cons of fee-only vs. commission compensation structures for people who use financial advisors.

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PutCall 1179 days ago

I'm not much of one for mutual funds myself. But the math doesn't lie. If you're going to invest in funds. Use A-Shares.

0x520x430x45 1177 days ago

Generally, A shares are better, though that varies on a case by case basis. Time frame, fund expenses, etc. make a difference. If you use American Funds, for example, the C shares are not that much more expensive at any point in the life cycle, all the way up until they convert. The added liquidity just might be worth the (minor) extra cost.

pickinem 1179 days ago

I disagree. Commission brokers make a living by *selling.* Anyone who isn't fee-only is just out to rip you off.

0x520x430x45 1179 days ago

@pickinem You should consider the fact that for many people, "fee-only" advisors are going to end up costing more money. I work both ways, fees and/or commissions, depending on the client's needs. For many clients, they are going to buy "commissionable" products somewhere anyway, so charging fees on top of that is not client-friendly. Do you think that anyone selling anything is always "out to rip you off" or does that just apply to financial products?

pickinem 1179 days ago

Yes. I would say that it applies to things other than financial products. If somebody stands to make more money by selling you one thing than another, why would they give you an unbiased opinion?

0x520x430x45 1178 days ago

Understood, although that is a somewhat cynical (albeit somewhat accurate) view of the sales process. Consider this, though...A "fee only" advisor is also selling something, and I know several who "up sell" their prospective clients on financial plans and services that their clients could do without. Mostly, all I am saying is that every method of compensation has potential conflicts of interest. An unethical advisor will find a way to "rip off" his clients, regardless of the way he gets paid.

thekritz 1179 days ago

I don't think you can categorically say that one system is better than the other; it depends on the needs of the client and the motives of the broker. With an honest advisor, obviously, a commission-based compensation system would make sense. On the other hand, if a client merely needs general guidance warranting continuous portfolio monitoring, then naturally the fee system would be preferable.

mkay 1178 days ago

The author may not be aware that there is a growing number of fee-only (not fee-based) planners that charge on a flat project fee or an hourly rate for financial planning services. The author made it sound like the pricing comparisons are simple, when they actually are not. First off, there are a variety of load charging scenarios beyond front loads. Internal fund expenses were not discussed, nor were 12b1 fees, not to mention special incentives, soft dollar compensations, and not to mention commision structures for insurance and annuity products. Consumers need to understand what they are being charged (why not listas a $ amount instead of %'s whether they write a check or have it deducted from their account) and what services they should be getting for their payment. I just want there to be broad transparency so true comparisons can be made. Unfortunately, many consumers are not aware of what goes into the overall financial planning process and look at it as exclusively selecting investments. Reviewing one's overall financial health, and providing advice on cash flow, debt management, goal planning, taxes, and risk management issues are all key pieces to providing comprehensive advice in addtion to the investment analysis and recommendations.

ObliviousInvestor 1178 days ago

Wow. Lots of discussion on this one. :)

@mkay: You make a good point. In an effort to keep things simple for readers, I didn't discuss every aspect of every type of compensation structure or financial product.

I actually used to be a financial advisor. And I did some business with A-Shares, some with C-Shares, some in fee-based accounts, etc. The only point I was trying to make here is that *each* of them have their advantages, and that I think the A-Share/up-front commission model gets a bad rap from the media.

Also, I very strongly agree with you that greater transparency of charges would be an big move in the right direction of puting clients' interests first.

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