Investments 101: Understanding What “Fee-Based” Really Means

puzzled consumerConsumers are often confused about the terms used in the investment industry. Sometimes it’s not their fault.

Unscrupulous practitioners deliberately use misleading terms in an attempt to appear something they’re not.

“Fee-based” is a great example of that.

Why we think fees are better than commissions

Those of us who charge fees (as opposed to commissions) believe our way of doing things avoids conflicts of interests and puts us on the same side of the table as the consumer.

After all, when your commission-based broker tells you to buy something, is it really because he or she thinks it’s best for you? Or is he just getting a big, fat commission? The sad thing is, you’ll never know.

Our way of doing things takes that fear away.  Whether you invest in Fund A or B, in stocks or bonds, or just sit it out on the sidelines in cash, it does not affect how we get paid, so we have no incentive to steer you one way or the other just to make money. We do well when you do well.  It’s that simple.

Plus we have a sworn legal duty, called a fiduciary duty, to always do what is best for you, not best for us.

We call ourselves “fee only” advisors because we provide financial planning and investment advice on a fee-only, non-commission basis. We are very proud to practice the way we do.

“Fee-only” versus “fee-based”

So if you see the term “fee based,” you might just think it means the same thing.

But you would be very wrong.

In reality, “fee based” is the equivalent of the “pre-owned” car. The term is deliberately designed to make something appear other than what it really is.

By now, consumers are probably savvy enough to know that “pre-owned” is just a fancy word for a “used car.”

But do consumers really know what “fee-based” means?  Probably not. And many will be fooled.

So what does “fee-based” really mean?

In our industry, the true meaning of  “fee-based” means an advisor who takes a fee based on the size of your portfolio but is also paid by commissions from the investment products they sell.

“Even though both fee-only and fee based financial advisors may have accounts they manage where they charge a percentage of the assets they manage, the investments they place inside these accounts can be very different,” writes Dana Anspach in a column on Money Over 55.

That doesn’t mean “fee-based” is necessarily bad. It’s not the way we work, nor is it the kind of practitioner we would want our mom or best friend to use due to inherent conflicts of interest.

But the real problem with “fee-based” is that the consumer just doesn’t understand what it means. Consumers picking a “fee-based” advisor thinking that person is really on their side might be getting a lot more than they ever bargained for … a lot more commissions, a lot more surrender charges, a lot more questionable investments.

That’s enough to make veteran columnist and insider Bob Veres call “fee-based” one of the “7 dirty words” that misleads consumers and hides the truth about how some advisors in the investment industry really work.

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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