As stated in the “Good” section, the theory behind why Fee-Only advisors are good is because they can’t make a commission from the sale of a product or security (life insurance, annuities, or securities). As such, they are supposed to be non-biased and are therefore free to recommend whatever is in the client’s best interest.
As stated in the “Bad” section, the bad about Fee-Only advisors is that they know very little about commission based products (ones that EVERY “good” advisor must know if their goal is to provide the best unbiased advice to clients).
The Ugly—Lack of Full Disclosure
Fee-Only advisors like to tout that they don’t make commissions from the sale of products. It’s usually plastered on their websites. The fact that they don’t make commissions is one of the first things they will tell a potential client (disclose to clients) as a reason why they are better than other advisors in the industry.
What don’t Fee-Only advisors disclose? Biases against commission based products!
As stated briefly in the “Good” section of this website, there are a few good and unique commission based products. Click here to learn about three useful commission based products that ALL advisors (even Fee-Only) should know about and use when appropriate.
Fee-Only advisors do NOT disclose to clients their built-in biases against commission based products.
Fee-Only advisors do NOT disclose to clients that they know very little if anything about several of the “good” commission based products.
This is the Ugly about Fee-Only advisors. It’s bad NOT to know about and use good commission based products with clients. It’s worse or what I call Ugly not to disclosure your built-in biases and limitations.
Who cares? Anyone considering using a Fee-Only advisor.
Think about the following. If there was a commission based product where money could grow tax-free, be removed tax-free, allow money to grow without risk of loss, and where the gains are locked in every year never to be lost, should all advisors (even a Fee-Only advisor) not only know about this product but also recommend it to clients when appropriate?
Absolutely.
What if there was a commission based product where there is NO risk of loss, where gains are locked in annually, where the average rate of return is between 3-6% and could come with a guaranteed income for life option? Should all advisors (even a Fee-Only advisor) not only know about this product but also recommend it to clients when appropriate?
Absolutely.
What is a fiduciary? Investopedia says the following:
A fiduciary owes to clients a duty of good faith and trust. The highest legal duty of one party to another, being a fiduciary requires being bound ethically to act in the other’s best interests.
It’s a big deal to call yourself a fiduciary where your duty is to act in good faith and always act in your client’s best interest.
Fee-Only advisors tout the fact that they are fiduciaries
How can a Fee-Only advisors be true fiduciaries when they know nothing or very little about commission based products and when the vast majority of them will NOT recommend good commission based products to clients?
As an attorney, I can tell you that they should NOT be touting themselves as fiduciaries.
Looking down their nose
Many Fee-Only advisors market themselves as better than other advisors because they are Fee-Only and don’t make money from commissions.
After interacting personally with a significant number of Fee-Only advisors, I can tell you that they have no business touting themselves as superior to other advisors.
There is little else that is worse than an advisor who touts themselves as better than others when they are NOT (and are arguably worse because they are in an environment where it’s nearly guaranteed that they can’t give as good as advice as other types of advisors).
Fee-Based Advisors
What type of advisor do I recommend? Fee-Based advisors.
What is a Fee-Based advisor?
It’s one that makes money like a Fee-Only advisor but can also make money from commissions on fixed life or annuity products. Like Fee-Only advisors, Fee-Based advisors can’t make money from commissions paid from securities products (like 12b-1 fees).
A Fee-Based advisor does NOT have built-in biases about commission based insurance products.
A Fee-Based advisor typically incorporates the use of commission based products when appropriate, unlike Fee-Only advisors who shun commission based product.
Which would you rather work with?
A Fee-Only advisor who touts that he/she has your best interest at heart even though they know little if anything about several very useful commission based products or an advisor who not only knows commission based products well, but incorporates them into a financial plan when appropriate?
If you buy into the cult concept of Fee-Only advisors, you might opt to use one.
For me, Fee-Based advisors are the ones who are positioned to give clients the best advice.
Roccy DeFrancesco, JD
Author of:
–Bad Advisors: How to Identify Them; How to Avoid Them
-Retiring Without Risk
-Peace of Mind Planning: Losing Money is no Longer an Option
-The Home Equity Acceleration Plan
-The Home Equity Management Guidebook
-The Doctor’s Wealth Preservation Guide
-21st Century Advisor
-21st Century Attorney
roccy@badadvisors.com
269-216-9978 (direct)
