Financial advisors generally fall into one of two camps: those who sell products and those who don’t. In industry jargon, that’s the difference between fee-only and fee-based. The names sound similar, but the business models behind them are different, and those differences can have a real impact on your financial future.
Compensation: How Each Advisor Gets Paid
A fee-only advisor earns no commissions and doesn’t sell products. Their compensation comes from a straightforward, transparent management fee paid directly by you.
A fee-based advisor, on the other hand, may charge a management fee and earn commissions from the products they recommend. Many also receive additional compensation from mortgage lending or cross-selling other services. It’s worth noting that the vast majority of U.S. advisors operate under this fee-based model.
Fiduciary vs. Suitability: Two Very Different Standards
The second big distinction is the standard of care each type of advisor must follow.
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- Fiduciary standard: Requires an advisor to put your interests first, period.
- Suitability standard: Only requires that an investment be “suitable” for you. (There’s a big gap between choosing the right thing and choosing something merely “suitable.”)
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Fee-only advisors operate as fiduciaries at all times. Fee-based advisors do not.
When giving advice, they’re fiduciaries. But when implementing that advice, i.e., recommending products, they switch to the lower suitability standard. That midstream hat-switching creates confusion for investors and weakens the alignment of interests.
Pittenger & Anderson is fee-only, which means we’re fiduciaries 100% of the time.
How to Tell the Difference
If you’re trying to determine whether an advisor is fee-only or fee-based, here are two easy tests:
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- Look at their website. Scroll to the bottom of the homepage. If you see language such as: “Securities offered through…” or “Member FINRA/SIPC,” you’re looking at a fee-based advisor who earns product-related compensation.
- Check their Form ADV. Every Registered Investment Advisor must file a Form ADV with the SEC. You can find it on the Investment Adviser Public Disclosure (IAPD) website.
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Under Item 5 – Compensation Arrangements, look for whether the “commissions” box is checked. If it is, that advisor is fee-based.
Fee-only advisors make this distinction clear. They’ll highlight “fee-only” in their marketing, and on their Form ADV the commissions box will be unchecked because commissions create conflicts they deliberately avoid.
Why It Matters
As you evaluate financial advisors, make sure you understand how they’re compensated and whose interests they’re required to put first. The difference between a full-time fiduciary and someone held to a suitability standard compounds over time.
We believe it’s essential to choose an advisor who is incentivized to keep your investment costs low, not one who benefits from keeping them high. Over time, the cost difference isn’t just noticeable, it can be staggering. (See our previous blog post “Why investment fees matter.”)
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Pittenger & Anderson, Inc. makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.
Pittenger & Anderson, Inc. does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Additionally, the information presented here is not intended to be a recommendation to buy or sell any specific security. To learn more about our firm and investment approach, check out our Form ADV.
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