“So the way I see it things will pretty much be the same, but my accounts will just be held at Schwab, right?” my client asked.
“Yes, kind of…” I replied.
This was the general response when I recently led Merino Wealth to become a fee-only financial planning firm. For years we’d been moving in a direction that looked like many fee-only firms, so on a surface level many clients didn’t see or feel much of a difference. It’s really important to note that we weren’t fee-only, though. Up until now we were a fee-based firm, NOT fee-only. It may sound like the same thing, but it most definitely is not. What’s the difference? It all comes down to how the advisor/firm is compensated, so let’s start with breaking down some definitions.
What Is a Fee-Based Financial Advisor?
A fee-based advisor can take fees directly from the client, but they’re also authorized to sell commission-based products. You can think of this as a hybrid type arrangement where we were able to offer investment advice such as financial planning and investment management services, while also having the ability to offer commission-based products such as brokerage accounts, insurance, and annuities.
Commissions are paid by the product company directly, which leads to concerns of conflicts of interest. With commission-based products, the advisor is required to adhere to a suitability standard.
Ex. Jane hires a fee-based advisor who takes a financial planning fee of $6K and invests her $300K into a commission based investment with an upfront 5% commission.
The advisor’s firm receives $6K for a financial planning fee paid for by the client along with a $15K one-time commission.
What Is a Fee-Only Financial Advisor?
In the case of a fee-only financial advisor, they’re compensated directly by their clients for advice, plan implementation, and the ongoing management of assets. As a fee-only firm, the advisors of Merino Wealth will no longer accept commissions for their work. This helps to minimize conflicts of interest. Fee-only advisors are required to put their clients’ best interest first by following a fiduciary standard.
Ex. Jane hires a fee-only advisor who takes a financial planning fee of $6K and invests her $300K into an advisory account with a 1% annual management fee.
The advisor’s firm receives $6K for financial planning fee paid for by the client along with a $3K annual management fee paid to the advisor’s firm throughout the year and every subsequent year that they continue to work together.
How Are They Different?
The biggest difference is that fee-only advisors don’t accept commissions for their work and are required to adhere to a higher fiduciary standard. Commissions aren’t accepted, which helps to minimize conflicts of interest.
Back to our Jane example where the fee-based advisor’s firm receives a $15K commission from her $300K investment … While the commission isn’t necessarily bad in this example, the underlying concern is that receiving $15K upfront could incentivize the advisor to recommend the commission-based investment. With the fee-only advisor, the 1% management fee stays the same regardless of the underlying investments within the account. This helps to reduce the conflicts of interest associated with the advisor’s recommendations.
We believe that operating as a fee-only firm minimizes our conflicts of interest and provides a more transparent service model for our clients at Merino Wealth. Want to see if working with a fee-only advisor will help you to reach your possibilities? CLICK HERE!