Understanding Feebased Investment Advisors

There are three types of fee-only investment advisors: money managers, financial planners, and advisors who do both.

Fee-only managers make investment decisions for clients based on the risk tolerances and goals of the client. They are paid a percentage fee that is usually based upon the value of the account. No income is derived from commissions.

Fee-only financial planners assist investors with budgeting, retirement planning, estate planning, taxes, investments, life insurance, and real estate. On smaller estates, they are paid a fee usually based on the amount of time it takes to complete the plan. These fees usually run about $250 per hour. Once you have achieved sizeable income, you might want to pay a yearly retainer based upon the size of your estate or net worth. Retainers are negotiable but usually range from .5 to 1 percent. Most importantly, they do not receive any commission from any investment or life insurance product they recommend.

The advisors who do both money management and financial planning normally charge a percentage fee based upon assets. However, some charge a percentage fee for the money management and an hourly fee for financial planning.

The primary advantage offered by fee-only advisors is the way they are compensated. Advice and commissions are separated. The only way a fee-only money manager can increase his or her own income is to increase the performance and therefore the size of the client’s portfolio. This produces a win/win relationship for both the client and advisor. If the fee-only advisor is independent, there is no management influence or commissions quota. The only disadvantage might be the experience of the advisor. The new Investment Advisor Act recently divided the regulation of investment advisors between the SEC and the state securities department. Firms with assets under $25 million are regulated by the state securities department, while those with assets over $25 million are regulated by the SEC.

Don’t be confused by the two terms fee-only and fee-based. They are not the same. Fee-based RIAs (Registered Investment Advisor) manage portfolios for clients but receive commissions and fees. Some offset their fees by the amount of the commissions charged to each account. The commissions can be somewhat disguised using a technique known as soft dollars. The broker used by the advisor for trading purposes will charge additional commission (a few cents per share) to each trade made in each client’s account. The brokerage firm will pass along the additional commission to the advisor by paying for certain services that are normally part of the advisor’s own overhead expenses, such as research, software, and market quotation services. Some fee-based RIAs offer financial planning.

The advantage of using an independent fee-based RIA is the absence of influence from management normally experienced at full-service brokerage firms. The primary disadvantage involves how they are compensated. As is the case in dealing with investment brokers, many investors feel commission-based investment advice from a non-fee-only RIA is a conflict of interest. When you have any investment planning done by a non-fee-only RIA, make sure you know the full extent of commissions that will be involved in all the suggested investments. Fee-based RIAs are regulated by the SEC, your state’s securities department, and the National Association of Securities Dealers.


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