Guest Blog Entry -Dave Fernandez, CFP® – Fee-only vs Fee-Based

I would like to thank Dave Fernandez, CFP® for providing this excellent article on the difference between Fee-Only and Fee-Based.

What is the Difference Between “Fee-Only” and “Fee-Based?”

Coin stacks with letter dice – Fees

Do you know how your financial advisor is compensated?  Two common forms of financial advisor compensation are called ”fee-only” and “fee-based.”  They sound very similar, but they have vastly different meanings.  Whether your advisor is “Fee-Only” or “Fee-Based” can have a huge impact on the type of advice you are provided and the types of investment products which are recommended to you.

Let me provide a made up example related to the medical industry to help differentiate the two fee compensation terms.  Not everyone has worked with a financial advisor, but we all have visited a doctor.

Let’s assume you decide to visit your doctor because you have a health issue.  Upon the visit, your doctor analyzes your health problem, provides you with a recommendation, possibly sends you to a specialist for further diagnoses, or gives you a prescription to take to your local pharmacy.  In return for the doctor’s time and expertise, you likely paid him/her an out of pocket co-pay and/or your health insurance pays them a fee for your visit and any particular procedures or testing done.  This scenario would be considered fee-only.  You received a recommendation and the doctor received a fee.

Now let’s assume you visit your same doctor for the same health issue.  But we further assume that the doctor’s compensation comes from two sources: 1) a fee for an initial assessment of your health issue and 2) the doctor also receives a commission for any particular health recommendation, procedure, referral to a specialist or pharmaceutical prescription sold.  What if we take this one step further and also assume that not only does your doctor receive a commission for his/her recommendations, but that their commission based revenue can only come from a select group of products or procedures chosen by the health organization they are affiliated with?  Do you see any potential conflicts of interest in this scenario?  Would this cause you to question if you were receiving the best medical recommendation, or, if what your doctor recommended was potentially based on what paid your doctor the highest commission?  This would be considered a “fee-based” compensation arrangement.  The doctor receives a fee for the initial visit but also receives commissions for specific recommendations, procedures, referrals or prescriptions sold.

Consumers are fortunate the fee-based arrangement does not actually exist in the medical industry.  However, it is common in financial services.

The two examples above can be directly substituted into the financial advice industry.  Fee-Only means the only source of compensation your financial advisor receives is from fees paid directly to the advisor from clients. This could be in the form of an hourly fee, a retainer fee or a fee based on a percentage of the assets under investment management. Regardless of the type of fee, the point is that the client pays only a fee and no other type of compensation is charged. No commissions are received. No financial products are sold such as load mutual funds, commissioned based fixed and variable annuities, equity indexed annuities, whole life insurance or universal life insurance.  The advice and compensation is totally independent of the financial products recommended.

Fee-Based is a term the brokerage and insurance community developed to counteract the success of the Fee-Only classification. The terms certainly sound similar and consumers are confused, so their strategy seems to be working.  I can’t tell you how many times I have received a phone call from a consumer looking for a new financial advisor and one of the first things they say is that they are looking for a fee-based advisor.  I always enjoy having that conversation and explaining the terminology differences as most consumers are greatly surprised.

Where Fee-Based can be confusing and potentially misleading is that not only does an advisor receive fees, but they can also accept commissions from financial products recommended such as load based mutual funds, or annuities and insurance. This system creates the potential for a huge conflict of interest. If an advisor, like the doctor above, has the opportunity to recommend a particular financial product that pays him/her a commission versus a financial product that does not pay a commission, do you think they could be incentivized and influenced to recommend the commissioned based product?  Or, what if their product inventory only allows the choice between a select group of commissioned products based on the affiliation of their broker dealer?  Would this raise a question – are the financial products offered to me what is best for my financial situation, and, do they make use of the best potential options considering the whole universe of financial products available?

No compensation system is perfect and free from all conflicts of interest.  And certainly there are some great fee-based advisors doing amazing work for their clients.  But we strongly believe the fee-only compensation method most closely aligns the interest of consumers with their financial advisor.  We are proud and fortunate to belong to a great organization called (National Association of Personal Financial Advisors), which represents a like-minded group of fee-only, fiduciary based financial advisors throughout the United States.

So when deciding which advisor you would like to hire, we suggest that you ask how the advisor is compensated, request that they disclose their compensation in writing and look for someone who is paid as a “Fee-Only” advisor to eliminate as many conflicts of interest as possible.

Or, if you decide to work with a fee-based, commissioned advisor, at least look for one that is licensed under a fiduciary regulation.  The fiduciary law requires that all compensation is disclosed in writing.  Thus if you are going to pay commissions for advice and financial products, you will at least know what you are paying for.

About The Author

Dave Fernandez, CFP® is a native of Arizona and has over 20 years of experience in the financial services industry.  He started his financial services career in 1995.  As a NAPFA Registered Financial Advisor, Dave owns a fee only financial planning and wealth management firm, in Scottsdale, Arizona called “Wealth Engineering, LLC.”

Investor Protection – The Department of Labor – Advisors Should Act in Your Best Interest – I Agree!

Investor Protection – The Department of Labor – Advisors Should Act in Your Best Interest – I Agree!

Alert_Financial_Advisors_Your_Best_InterestsThe department of Labor has an article where they are blunt about investment advice that involves a conflict of interest.  As you know, I am a fee-only advisor precisely because of the Department of Labors Concerns and:

1) I am a fiduciary that will act in your best interest

2) I LOVE being able to tell people that regardless of what investment product I recommend, my compensation does not change.  It is liberating to be able to choose the best product without regards to how I get paid.  My compensation/fee is easy to calculate, understand, and is completely transparent.  You know exactly what you are paying for.

Here is the Article:

and here is a video they embedded in the article.  Please note that this video is the department of labor’s video and not mine but it demonstrate the potential conflict of interest for some advisors.

How is a fee only Advisor Different than the Video? 

Simple! We get paid ONLY the fee agreed upon by the client.  We then seek out the best pricing for the investment product we use.  We have an incentive to locate the best product for you, without the bias of how much we will get paid.

What Should You Do? Investigate if Your Advisor is Working in Your Best Interest

1) Ask if your advisor makes a different level of compensation depending on the product they recommend

2) Ask your advisor how they are paid.  If you are paying a fee, ask if that is the ONLY compensation they receive related to your accounts

3) Ask if your advisor is a fiduciary and will always act in your best interests.  In my investment advisory and financial planning contracts I am a fiduciary and am contractually obligated to act in my client’s best interest and disclose any and all conflicts of interest.



** The information on this website is intended only for informational purposes. Investors should not act upon any of the information here. Reh Wealth Advisor clients should discuss with their advisor if any action is appropriate.

Image by Stuart Miles at  Video from the US Department of Labor

Investor Protection – Beware of “Senior / Retirement Designations / Specialist”

Investor Protection – Beware of “Senior / Retirement Designations / Specialist”

Investor Protection Beware Senior Specialist Retirement Specialist Titles

In this article covering investor protection we look at “titles” for advisors.  One trend that investors should be cautious of is the creation of designations or titles in the finance world that imply expertise in financial planning for seniors and retirees.  These “Retirement Designations” should be viewed with caution.

There Are Few Legitimate “Senior or Retirement Designations” that are meaningful

While at first it may appear that someone that is a “specialist” in the retirement planning or senior planning is exactly what you need if you are a retiree or a senior, the truth is that there are few, if any, rigorous designations or official specializations that I am aware of.

Massachusetts Has Banned Bogus Senior Designations Since 2007

As detailed by the Boston Globe here:

LPL Financial, which is based in Boston, has been fined $250,000 after state regulator said its advisors were using titles and designations that didn’t measure up.  Secretary of State William F. Galvin actually said that 10 different senior designations were used that violated the state law which has been in effect since 2007.

William F. Galvin states:

“In these days when workers are increasingly having to assume responsibility for their retirement savings, it is vital that the financial services industry not employ titles that suggest an expertise in advising senior citizens when none exists…..That is why Massachusetts has these rules in place.” – William F. Galvin Secretary of State Massachusetts.

AARP Provides Recommendations to States to Prevent the Misleading Use of Senior Designations

The AARP’s Public Policy Institute has released a 6 page recommendations to States to help curtail the misleading use of designations.  You can read the recommendations here:

The SEC has issued a Warning About “Senior Specialists” and “Retirement Advisors”

At the link below the SEC, Securities and Exchange Commission, issued a warning about these designations.

As stated by the SEC in the links provided:

“The Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA) do not endorse professional designations or titles such as “senior specialist” or “retirement advisor” that some financial professionals use to market themselves.

The requirements for being designated as a “senior specialist” vary greatly. In some cases, a financial professional may need to pass several rigorous exams and have several years of experience working in a particular field to receive a specialist designation. Other “senior specialist” designations may be relatively quick and easy to obtain, even for an individual with no relevant experience” – Securities and Exchange Commission

The Take-Away

While outside of Massachusetts, Advisors can use senior and retiree specialist titles but the investing public should take these titles with a grain of salt.  The CFP designation and CFA Charter demonstrate much higher levels of experience and training than the other titles.  Both programs go into great details on investing and financial planning for seniors and retirees.  Further, I question the wisdom of a program offering those designations when the SEC and state regulators have specifically called out that type of designation.

** The information on this website is intended only for informational purposes. Investors should not act upon any of the information here. Reh Wealth Advisor clients should discuss with their advisor if any action is appropriate.

Image by Stuart Miles at