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Fee-Only vs. Fee-Based Advisors
Is your financial advisor a fiduciary to you?
Across the financial services industry, there are three main types of firms:
1. Fee-Only Firm: This type of advisory firm does not accept any fees, compensation or commissions based on product or investment sales. They are compensated solely by their clients. Clarity Capital Advisors is a fee-only wealth advisory firm. This means we have eliminated the conflicts of interest associated with commission-based and fee-based advisors. We are a fiduciary to you.
2. Commission-Based Firm: This type of advisory firm (e.g., commission-based investment managers) earns commissions on the financial products they sell to their clients. Not a fiduciary.
3. Fee-Based Firm (also known as a Commission and Fee Firm): There really isn't a "fee-based" firm, the term was created by the industry and big firms to confuse investors into thinking they are investing with a firm that will just charge them an annual fee, like a fee-only firm. Not so! This is by far the most common financial firm available to investors. Big names such as Merrill Lynch, Morgan Stanley, JP Morgan, UBS, Wells Fargo Advisors and other bank and insurance programs. Just because it's commonplace does not make it right.
Such firms use a fee-only structure for some services, while their advisors earn additional commissions on other services and investments they sell to their clients. This is known as a fee-based structure and it's riddled with conflicts of interest for clients as many fee-based advisors will not disclose when they are earning additional commissions or 12b-1 fees above the advisory fee they are already collecting from their clients. We see these advisors charge an annual asset-based (percentage) fee for "wealth management services", then turn around and recommend to their clients mutual fund and/or annuity investments that pay a nice commission on top! This is why they are called "commission and fee". Not a fiduciary.
FACT: When you are the only source of income for a financial advisor (i.e., fee-only), the advisor works for you and only you. When an advisor receives compensation from other sources such as commissions from mutual funds, annuities, and managed asset accounts, your advisor works for someone else and cannot be a fiduciary to you at all times.
Suitability Standard vs. Fiduciary Standard
Under current financial laws and regulations, there are two sets of rules. One set (the Suitability Standard) is for advisors who sell financial products; generally fee-based and commissioned financial advisors at the larger firms, registered representatives, insurance company representatives, and all "fee-based independent financial advisors". Under the Suitability Standard, it is impossible for the fee-based or commissioned advisor to be a true fiduciary to the client at all times. This means that investment products such as an annuity or a mutual fund sold by one of them for a commission must be suitable for the client but need not be the best possible investment product to meet the client's needs. We would equate this to a doctor prescribing a medication that is "suitable" for your illness, but not necessarily the best possible medication for you.
The other set of rules (the Fiduciary Standard) governs advisors who only charge a fee for their services (i.e., fee-only) which is the only way they are compensated. Fee-only advisors do not offer any commission-generating investments or insurance products. Clarity Capital Advisors is bound to the Fiduciary Standard.
Now, ask yourself, is a fee-based advisor or a commission-generating advisor the type of financial advisor you would trust to make the best decisions for your financial future? Probably not.
Question: How do I know if my advisor is a fee-based advisor?
Answer: Ask your financial advisor one simple question. Which securities licenses do you hold?
If your advisor holds a Series 6 or a Series 7 license in addition to the Series 65 or simply the Series 66 license your financial advisor is a fee-based advisor and is unable to be a true fiduciary to you at all times. Fee-based (commission and fee) advisors and commissioned advisors are employed with the larger firms such as Merrill Lynch, UBS, Morgan Stanley, J.P.Morgan, Ameriprise and Edward Jones, etc., the national and regional banks (Wells Fargo, Bank of America, etc.) or with an insurance company (Transamerica, Northwestern Mutual, Mass Mutual, etc.). Advisors who are independent, but affiliated with a broker-dealer are fee-based advisors.
How are they able to charge a fee and collect commissions?
The Series 6 and 7 licenses enable fee-based advisors to collect commissions from selling mutual funds and/or investment products like annuities and the Series 65 allows them charge you an additional advisory fee on top of the commissions you already paid! The Series 66 license is simply a blend of the two. In the industry this is referred to "financial double-dipping" or "the wearing of two hats". Don't get caught in this expensive trap!
Fee-only fiduciary wealth advisors will only hold the Series 65 license and professional designations and do not offer commission-based investments to their clients.