Reason Financial Advisors believes that clients should be fully aware of all costs when shopping for financial advice. So, it’s important to understand the three ways that clients can pay for financial planning services.
- Commission only: An advisor receives a commission for the sale of a product, based on the dollar amount of the sale.
- Fee Based: An advisor charges a fee, perhaps to write a financial plan, plus receives a commission for any products sold to implement the plan.
- Fee-Only: An advisor bills a client for services provided, but receives no other form of compensation from any third party.
At first sight, Fee Base might sound like Fee-Only. But it is not; Fee Based can include products that give your advisor a commission.
Because not all products carry the same commission schedule, a bias may prompt a commission only or fee based advisor to sell products that give him or her a higher payout. A combination of commissions, incentives, rebates, and other types of soft dollars can easily lead an advisor to recommend a product based on what’s in his or her best interests, rather than yours.
This is why Reason Financial Advisors offers services on a fee-only basis and does not receive commissions for any insurance or investment products we recommend. We work for our clients, not a brokerage firm, insurance company or bank. We also do not pay any referral fees to someone who recommends our services, nor do we accept any fees from other professionals we recommend to our clients.
Here some of the dangers that you avoid by using our fee-only approach
On November 17, 2003, the Washington Times reported that a major brokerage firm was fined $50 million by the U.S. Securities and Exchange Commission for various mutual fund abuses. The article stated “the firm had a select group of mutual fund companies pay it substantial fees for preferred marketing of their funds. Moreover, to encourage the sales force to recommend the purchase of those particular funds, the brokerage house paid more to individual registered representatives and branch managers on sales of those funds’ shares.”
On December 21, 2004, the Wall Street Journal reported that a major brokerage firm agreed to pay $75 million to settle regulatory charges brought by the Securities and Exchange Commission, the National Association of Securities Dealers and the New York Stock Exchange. According to the article, the firm “steered investors to seven preferred mutual-fund groups, without telling the investors that the firm received hundreds of millions of dollars in compensation from those funds.”
On February 23, 2005, the Wall Street Journal reported that the National Association of Securities Dealers fined two large brokerage firms for “giving preferred sales treatment to mutual funds offered by certain fund companies in exchange for brokerage commissions and other payments.” One brokerage firm that is owned by a major national bank was fined $570,000, while the other firm paid a $275,000 fine.
© 2015 Reason Financial Advisors, Inc.