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Bogue Asset Management’s Quarterly Investment Letter In my latest newsletter I discuss how my tactical overallocation towards overseas stocks and non-core US bonds paid off and I continue to see headwinds in the return potential of U.S. stocks over the next five years .........[See More]

    

How your advisor is compensated does matter.  Lately there has been a blurring of the lines with the use of the term “Fee-Based” to describe how one is compensated.  I’ll tell you why Fee-Based is not Fee-Only and the difference can be substantial: [See More]

 

    

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Fee Based is Not Fee Only

Fee Based vs. Fee-Only

Over the years I have had many initial interviews with potential clients and one source of confusion is the differentiation of how financial planners are compensated.  In particular, consumers have a differentiating fee-based from fee-only compensation.  On the surface it appears the same where there truly is one underlying big difference.

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.

The term fee-based is truly a marketing gimmick.  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.  In reality, the planner is compensated in fees directly from the client in some situations and commissions in other situations. 

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.  Most importantly, fee based is not fee only.