The Fee Bag

How your financial adviser gets paid, and what it means to the returns in your investment accounts.

While investing in the 21st century is often thought of tumultuous, in my opinion, there has never been a better time to be an investor.

Given the types of advice and fiduciary standards that are available and the types of fees paid and transparency, there’s something for everyone. Finding the right adviser can be simpler than you think.

The most important thing to start thinking about is: what am I looking for? In part one of this two-part series, let’s take a look at how investment firms and professionals get compensated and why it matters.

Very few investors are unaware that fees and expenses matter a great deal in determining investment success. It might also help to know who pays them.

There are three basic types of fee structures a consumer pays: commission-based, fee-based, and fee-only.

While some structures may be better for you than others, it's important to remember that talented and caring professionals can be found in any of these categories.

Let’s analyze the commission environment first. Here, the broker (registered representative) gets paid for each of your transactions. The regulatory agency is different for commission brokers; they are regulated by FINRA instead of the SEC.

Brokers are bound to sell only investments that pay commissions and those investments that their broker dealer has in inventory. The best analogy I’ve seen comes from the noted financial services executive Elliot Weissbluth.

He describes the commission-based world as akin to entering a butcher shop, compared to seeing a dietician. You enter the butcher shop knowing you will buy something. They'll help find what you are looking for and probably point you to their best selections.

But you should never expect them to tell you their selections are unhealthy or that you should go somewhere else if there's a better choice. This is where the fiduciary standard becomes clearer.

A broker is held to a “suitability standard” by FINRA. What they sell needs to be “suitable” for the client, but not necessarily in the client’s sole best interest.

Why not pursue this type of fee arrangement? You will only be offered what pays the broker commissions, and because it’s transaction-based, there’s little incentive to dissuade a client from a transaction.

Does this mean the broker is not putting the client first? No. But it does mean certain conflicts of interest are ever-present.

Fee-based is a very similar model. Here, not only does the client pay the commission on commissionable products, but the client also pays a fee similar to a retainer.

The fee is usually based on the size of the accounts and relationship. Although there might be more incentive to act in your best interest, it’s also true that you generate fees and commissions. These can accumulate rapidly and negatively impact your returns.

Finally, there is fee-only. In this model, the advisor is a fiduciary and held to a higher standard by the SEC. The advisor must act in the client’s sole best interest.

In this arrangement, a client pays no commissions on buys and sells or for products. The client pays a fee, similar to a retainer.

Using Elliot Weissbluth’s analogy, the fee-only advisor is the dietician; they recommend foods based on all known factors of your health. They get paid to offer advice in your best interest.

What might be the pitfall here? A client may say paying a fee in a down year is unfair. Remember, however, that a commission is paid in the brokerage environment regardless of performance.

The essential question: Is the advisor achieving what is most important to me, less his or her fee?

It’s important to note the Labor Department is moving ahead with new regs aimed at nonfiduciary advisors or brokers.

The goal is to level the field for consumers who may be unaware their financial professional is not a fiduciary. The regs try to make all financial professionals fiduciaries. The new rules do little to change the lives of fee-only advisors or clients, but there has been tremendous opposition by commission-based brokers and those seeking to maintain the suitability standard. We expect that to remain strong.

The House of Representatives, as of June, already passed a bill to kill the new rules. As it stands, the standards are being phased in, and firms must be in full compliance by Jan. 1, 2018.

In the September/October issue of FW Inc., we will address the ramifications for you as a consumer. We’ll also focus on what services you’re looking for and the different wealth management models.


Craig Rogers is president of Rogers Wealth Group, a Fort Worth firm that provides collaborative wealth management services and institutional investing services in a fee-only arrangement. Rogers is an occasional contributor to FW Inc.