Your Consumer Guide to Fee-based Financial Advice; what are the advantages and how much does it cost? by Marc Lamontagne, CFP, R.F.P., FMA, CSA, March 2006

Independent financial planners and advisors may be compensated in several ways: by commissions, on a fee basis, or by a salary plus bonus, similar to those advisors employed by the banks. The difficulty in assessing a potential financial advisor is in understanding: (1) the cost, and (2) how your advisor’s compensation affects their services.

However the advisor is compensated, it is most important that the first meeting has full disclosure of the services being provided, the cost to you, how the financial advisor is compensated, and any potential conflicts of interest. This is typically done in a letter of engagement and disclosure.

Though only a small minority of financial planners and advisors are delivering their services on a fee basis, there is a growing recognition in the industry that this model helps reduce (not eliminate) conflicts of interest in an advisor-client relationship. This paper examines the type of fees available and the ranges you can expect to encounter.

ADVANTAGES OF DEALING WITH A FEE ADVISOR

When hiring a financial advisor you are looking for someone who is going to give you sound advice. The problem with the commission model is that your advisor is not paid to provide advice, but to sell you products. It becomes difficult to assess the value of advice if your advisor is being compensated by a financial services company whose profit is based on selling a particular investment or insurance product.

Even the most professional financial advisor finds that being paid by commissions can bias their advice, and a year 2000 survey found the overriding reason advisors convert from a commission to a fee model was to eliminate conflicts of interest.

The main advantage of fee-based is this: if your advisor is paid the same fee by you no matter which strategy or investment they recommend, then they will put your interest ahead of their own. They are now working for you.

There are other advantages, too. First, fees are easy to understand. They also offer, for the most part, greater transparency.

Second, fee advisors must deliver advice that you truly value and provide a high degree of service in order to retain you as a long-term client. That’s because they are easy to fire. The lead time needed to give a notice of termination is usually included in your letter of engagement (0 to 3 months). You don’t have to worry about back-end load commissions or deferred sales charges.

Third, fee advisors may have access to a larger selection of products. Some financial services companies don't offer a built-in commission option, so they would not be included on a commission advisor's product shelf.

Like your physician, a fee advisor is paid to provide you consultative advice. Like a pharmacist, a commission advisor is paid to provide you a product.

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