What is Fee Only?                                           

Advisors get compensated in different methods. One is Fee-Only. The others are Fee-Based and Commission-Only.

Advisors at major financial institutions such as Merrill Lynch and Morgan Stanley Dean Witter are Fee-Based.  A lot of investors get Fee-Based confused with Fee-Only.  Although they might sound alike, they are different in many ways.  With Fee-Based, the advisor charges a flat management fee plus other fees such as transaction fees, sales charges, miscellaneous expenses, and also commissions on products they sell to the investor in their asset allocation recommendations.  These advisors are very keen to push their own firm's products as it is one of their main means of income. Another pitfall for becoming a client of an advisor who is part of a big institution is that the client also pays out of his or her pocket for advisors having to share their profits with the company.  The firm has a profit sharing plan in place for its advisor program to cover the large overhead costs involved with everyday operations.  To cover all these expenses and to earn a living, the advisors have to charge a hefty management fee.  On average, a Fee-Based advisor charges 150 to 300 basis points. With these type of advisors, client's interests take a back seat to an advisor along with the company making a profit.

Commission-Only is very similar to Fee-Based, but commission-only advisors do not charge a management fee. They work strictly on commission.  Their main objective is to sell products. Their only incentive for dealing with an investor is that the investor might purchase one of their commissioned products. This type of a mind set might lead to bad advice.  These so-called advisors are basically brokers. If you do not buy their product, they have no obligation to you.  It's always selling with brokers.  Due to the nature of their business, their attention towards a client is very minimal.  They will be very attentive as long as you are purchasing their product, but once the investor has purchased it, they need to move onto another.  On average, Commission-Only advisors charge about 200 to 300 basis points annually. Along with commission they earn, they also charge fees very similar to Fee-Based advisors.  Their commission does not include transaction costs, sales charges, and other miscellaneous expenses.

In fact, some firms these advisors work for do not disclose their fees publicly until they have enough information on the investor.  Firms usually make the investor call their toll free number to speak to a local broker or an advisor.  They try to gather as much personal information they can gather before they actually explain their services and fees.  This is just an invasive sales tactic they practice to bring clients in to the firm.