Fee-Only vs. Fee-Based
How a financial advisor is compensated can directly impact the advice he or she gives you. The majority of “financial advisors” earn some or all of their income from selling annuities, mutual funds, insurance, stock, or other financial products. Even if these salespeople charge a small fee for their advice, they face inevitable conflicts of interest if any portion of their compensation comes from sources other than YOU, the client. As more consumers have become educated about the impact of an advisor’s compensation method, it has become more common for financial advisors to adopt confusing terminology to obscure how they are actually being paid.
What is the difference between fee-based, fee-and-commission, fee-offset, and commission?
The simple answer is not much! All of these compensation structures allow the financial advisor to earn some of their income from commissions on products they are selling. “Fee-based” is the new term for “fee-and-commission” planners who earn a small fee for developing a financial plan and then earn commissions from selling products. Some “fee-based” planners will charge a management fee on assets, but they may also earn revenue sharing fees, fancy vacations, and other compensation for promoting certain financial products. The term “fee-based” is very misleading, so you should be wary of those who use it. “Fee-offset” is when an advisor charges a fee for the plan and then reduces up to 100% of that fee to account for the commissions that are earned from selling products. The problem with all of these compensation methods is that the financial advice—whether you pay for it directly or indirectly–is still biased by any income an advisor earns from sources other than the YOU, the client.
What is “Fee-Only” and how is it different from all the rest?
“Fee-only” financial advisors are compensated solely by client fees and do not accept commissions or compensation from any other source. In other words, fee-only financial advisors do NOT sell insurance, stocks, bonds, annuities, mutual funds, or any other product. This approach eliminates most of the conflicts-of-interest that commission and fee-based financial advisors have. Working with a “fee-only” financial advisor ensures that the advice you receive is in your best interest. You can easily tell if a firm is “fee-only” by confirming they are a Registered Investment Advisor (RIA) with the SEC or any state, rather than a “registered representative” of a broker-dealer.
How does Sparrow Wealth Management set fees?
Sparrow Wealth Management, headquartered in Las Vegas, Nevada, operates as a “fee-only” firm because we believe there is a significant conflict of interest if an advisor stands to gain personally from any action recommended to the client. We charge a project fee or an hourly fee for financial planning. Our investment management fees are based on a percentage of the assets we manage. Therefore, we have a strong incentive to minimize your trading costs and fund management expenses and to maximize your portfolio value. Our fees can only grow when your investments grow.
Fee-Only Financial Planning in the News
“Eighty-four percent of the advisors on our list [of America’s top 250 financial advisors] are fee-only planners.”
—Worth, September 2001
“Financial Planners who take commissions have a built-in conflict of interest… my choice would be a fee-only planner.”
—Newsweek, Jane Bryant Quinn
“A financial planner’s compensation should be from fees alone.”