Fee only compensation means the advisor is compensated by a flat fee or percentage of assets under management (annually); compensation may also be based on an hourly rate or fee for service for specific tasks performed. In either case, there is no additional compensation (sales commissions, etc.) for services performed or investments provided. Registered investment advisors (RIAs), such as Paragon Financial Advisors, operate under this arrangement.
A fiduciary requirement exists: the firm must put the best interest of the client first in all cases. This fiduciary requirement includes advising the client of all aspects of advisor compensation and the disclosure of any conflicts of interest the advisor may have with the client’s portfolio.
Regulatory oversight for fee only advisors is provided by either the Securities and Exchange Commission (for firms with more than $100 million in assets under management) or the state securities agency (for firms with less than $100 million in assets). Such advisors are subject to random audits by the oversight agency and to penalties if appropriate rules are not being followed.
Fee Based (Fee and Commission)
In contrast, broker-dealers and businesses that buy/sell securities and also give advice are compensated by fees plus commissions. Those commissions may be based on a “per transaction” basis thereby giving the advisor an incentive to sell a specific product or products from a specific vendor (because of higher commissions paid).
No fiduciary standard exists (except in a few states) for fee based advisors. They are subject to a “suitability” requirement (i.e. “Is the investment recommended/sold suitable for the investor?”). Therefore, if two investments can be deemed “suitable” for a client and one provides a higher commission to the advisor, the advisor is free to choose either as appropriate for the client. Fee based advisors are generally not required to disclose to the client all compensation arrangements or conflicts of interest.
Regulatory oversight for fee based advisors is provided by the Financial Industry Regulatory Authority (FINRA). FINRA does have circumstances in which additional information concerning disclosure of conflicts of interest must be disclosed to the client; it also provides for dispute resolution between advisors and clients according to binding arbitration.
In other situations a fee only advisor can have arrangements/ownership in firms that are actually fee based. For example, a fee only advisor might have securities licenses that entitle him/her to receive commissions from a broker dealer. In such a case, the advisor must be registered with the SEC and subject to FINRA oversight as a broker. Thus the advisor is subject to a fiduciary standard when giving advice and a suitability standard when providing commission services. Sound confusing? It is.
Much discussion is occurring in the financial services industry about fee only vs. fee based. In addition, industry groups weigh in on the subject. The National Association of Personal Financial advisors require its members be compensated solely by the client and that neither the advisor nor a related party receives any compensation based on the purchase/sale of any product. The CFP Board of Standards requires that Certified Financial Advisors™ may not use the term “fee only” if they are associated with a broker dealer or any firm that receives transaction based compensation.
We at Paragon Financial Advisors keep it simple—we are a fee-only™ designation. We offer registered investment advisory firm. We are also a firm member of the National Association of Personal Financial Advisors and the three firm principles at Paragon hold the Certified Financial Advisorsfinancial planning and investment management services for our clients.