Fee Based is Not Fee Only

In the initial stages of meeting a prospective client, I am often told that they are looking for an engagement where the planner isn’t being compensated by a third-party for the advice they provide. Then the client states that they are looking for someone that is “Fee-Based” or says, “You are a Fee-Based planner, correct?” Consumers have difficulty differentiating fee-based from fee-only compensation. On the surface it appears the same
but in reality there are big differences,

According to the CFP Board, “a certificant may describe his or her practice as ‘fee only’ if, and only if, all compensation from all of his or her client work comes exclusively from the client in the form of fixed, flat, hourly, percentage or performance-based fees.”

In contrast, a fee-based financial planner can be directly paid by the client, but it can also be compensated by a third party in the form of commissions. The underlying problem with this type of arrangement is that if a third party is involved in the economic benefit of the planner there is the potential for that third party to influence the planner’s recommendations. An issue of the planner serving two masters rather than just solely the client can often bring conflicts of interest. That’s why some consumers want to specifically avoid a situation where commission is involved in the advice provided.

The term fee-based is truly a marketing gimmick. Think about it. Would it sound attractive to hear, “I’m fee-only sometimes and sometimes I receive commission.” It’s deceptive because the term uses fee but somehow omits the commission potential. Over the years the fee-only movement exposed the conflicts and problems associated with the commission model of providing financial advice. Concocted by the marketing departments of the major brokerage firms, the term fee-based was devised to blur the lines and confuse.

In the end, this doesn’t mean that a fee-based engagement isn’t a bad thing. Everyone has a set of wants and needs and a fee-based arrangement may be a good fit. Just make sure that you ask the right questions on how and where the advisor is going to be paid and how much they are going to receive from all parties. And if a prospective planner is overly promoting the fact that they are “fee-based”, this should serve as a red flag, because of the inherent misinterpretation that the word creates.