Fee-only vs fee-based: what everyone is missing!
When seeking help with your finances, you may be contemplating the merits of fee-only vs fee-based financial advisors. While there’s been much said on this topic, we feel other explanations fail to analyze past the obvious. There is an important aspect that is being overlooked by other discussions, which we’ll address in this article.
Before you get started, we’ve written at length on the topic of financial advisor fees. You may want to give these blogs a quick glance if you haven’t seen them already.
Low-cost ETFs: what you need to know
Average financial advisor fees – are you paying more than you should be?
Mutual fund fees can be sky high - know when you’re overpaying!
What is a fee-only advisor?
Before we get into the comparison, let’s talk about what a fee-only financial advisor is.
A fee-only financial advisor does not accept commissions, and works only for the client. Usually a fee-only advisor charges a fee for the assets they manage. However, there are other types of fee-only arrangements whereby the advisor may be paid by the hour, or paid a flat fee.
This type of compensation structure aligns the interests of the advisor with the client. As the assets grow over time, the advisor earns more money. There is no incentive to take undue risk for short term profits, as the advisor’s compensation would be impacted.
A fee-only advisor usually works for a Registered Investment Advisor (RIA) firm, registered with either certain states or the Securities and Exchange Commission. They follow the fiduciary standard, putting the client’s interests before their own.
What is a fee-based advisor?
A fee-based advisor is also called a “hybrid advisor” because he or she wears two hats.
- The advisor may manage your assets on an ongoing basis for a fee, following the fiduciary standard.
- Or, they may earn commissions for trades recommended, following the suitability standard.
Basically, the client gets to choose which way they’d like to be serviced.
There are very important differences between these two ideologies. The most important difference between them is a fiduciary must act in the best interest of clients, while suitability only means their recommendations must be suitable. We highly recommend that you take some time to familiarize yourself with the fiduciary vs suitability standard.
Fee-only vs fee-based advisors: the difference that nobody talks about
We’ve found that when others discuss the topic of fee-only vs fee-based financial advisors, there is one little thing they tend to overlook.
Although we ourselves are fee-only financial advisors in Philadelphia and we wholeheartedly believe that fee-only is better than fee-based, here’s the reality.
The overall level of fees paid by the client is what matters the most.
Fee-only or fee-based, the client should always strive to work with the advisor who offers the greatest value for the fee charged.
The lower fees, the better!
Because of the negative impact that high fees have on a client’s wealth in the long term, fees should be as low as possible, and this is generally conducive to working with a fee-only advisor. We have written on this topic at length; please refer the blogs in the beginning of this piece, as well as our article on what financial advisors cost.
There is an incentive for advisors earning commissions to recommend investments that come with higher fees, to recommend larger trades, and to trade more often. Mutual funds carry higher fees than ETFs, and in addition you are paying for their fund’s marketing expenses in the form of 12b-1 fees. It doesn’t seem like a big deal on paper, but small percentage differences in fees can add up over time.
For these reasons, working with a fee-only advisor is more conducive to the client paying lower fees, which is healthier for the growth of their portfolio in the long run.
Which ones take a smaller piece of the pie?
Fee-only advisors do tend to charge lower fees, in general. Because they do not earn commissions for trades recommended, they tend to avoid mutual funds with high 12b-1 fees. The average fee that financial advisors charge is somewhere around 1%, and we charge far lower than that, around 0.5%, because we feel it is in our clients’ best interest to keep fees low.
Does it really matter?
Well, yes.
The type of financial advisor you work with has a huge impact on the standard of care you receive, the fees you pay, and the decisions that are made regarding your wealth. All of this can have a huge impact on where you end up in the long term.
Finding a quality financial advisor goes beyond the question of fee-only vs fee-based; it’s about what the service entails. Many wealth managers focus on what we feel is of less significance – achieving a certain return with the portfolio. While that is important, what we feel is of greater value is behavioral coaching.
What is the value of financial advice?
We can recount numerous times when we have helped our clients avoid making major blunders. These setbacks can be very costly. Most of the time we are able to add value to our clients by preventing them from falling victim to the behavioral biases that many investors succumb to if operating on their own.
If you are managing your own finances, be aware of the inherent psychological traps that you could inadvertently fall into. They range from holding onto losing positions for emotional reasons to making choices based on too narrow a data range.
Work with a fee-only fiduciary advisor
We hope that our blog on fee-only vs fee-based financial advisors has been helpful to you.
Whichever way you choose to go, ask yourself if the advisor is going to provide the best value for the price paid, if that price is reasonable, if the standard of care with which they will handle your wealth is what you truly desire, and if you feel their services are going to truly make an impact on your long term outcome. In our experience, fee-only fiduciary financial advisors line up best with all of these ideals.
And we thought we might mention…
We are a fiduciary financial advisor in the Philadelphia, PA area, but we work with clients across the country. We provide fee-only, objective advice to our clients. If you would like to discuss a possible relationship, contact us.