By: Laura Walton AFC®
As my friend described his business model to me over lunch, I said, “Oh, you’re the jeweler equivalent of a fee-only planner! Your customer knows exactly how much they’re paying you and what they’re getting in return.” I think there’s every bit as much mystery to buying a diamond as there is to investing and that degree of mystery puts the consumer at a disadvantage. The fee-only model helps to level the playing field.
So, what exactly does fee only mean? In the case of the jeweler, he charges you for his time to find you the stone you want rather than mark up the stone. For example, you might pay $500 for him to find just the right diamond rather than him disguising his fee (and then some) in the cost of the stone.
Similarly, the fee-only financial advisor charges a fee for his advice. He doesn’t receive a commission on the sale of financial products, transactions, or from referrals. His fee is typically based on the dollar amount of assets managed while some charge a flat yearly or even hourly fee. You know exactly how much you’re paying and what services you’ll receive.
You may be surprised to know that the fee-only business model is rather new in the financial industry. Until recently, most financial professionals were commissioned sales people. Today many still are 100% commission based or use a blended model known as fee-based. These fees can be hard to discern which is why consumers sometimes think they aren’t being charged at all. And while commissioned sales people used to call themselves brokers, today everyone goes by “financial advisor” regardless of their fee model, making fees even less transparent and more confusing.
What are the advantages of the fee-only model?
(1) Transparency is often cited. You know your costs and, as we discuss in our Investing Series, the increase of even 1% in your costs can seriously erode your returns over time.
(2) Your advisor is free from conflicts of interest that might arise from receiving a commission. He can remain objective. See my earlier blog for a discussion of the fiduciary vs. suitability standard.
Don’t misunderstand. There are good advisors in each fee model. We believe, however, that the transparency and objectivity that the fee-only model brings to the client-advisor relationship is crucial in protecting the best interests of the client.
Similarly, if you need a jeweler, a fee-only jeweler seems a good choice!