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Financial advisors come in many forms, but they tend to fall into two categories: fee-only and fee-based. There are several important distinctions between the two that we will point out in this article. For disclosure purposes, Pittenger & Anderson is a fee-only investment advisor.
The fee-only business model is pretty straightforward. This advisor is compensated only by their annual management fee, which usually is based on assets under management. Fee-only advisors don’t participate in commissions, mutual fund transaction fees, or any other compensation scheme.
Fee-based advisors on the other hand are compensated in a variety of ways. As their name suggests, they charge a fee on assets under management, in addition to receiving commissions on products they sell, mutual fund sales loads, soft dollar arrangements, as well as other income sources. The fee-based model introduces our next topic: conflicts of interest and disclosure.
A conflict exists any time the client’s best interests and the advisor’s are not the same. To find out if conflicts exist, ask your advisor the following questions:
Is your compensation based on the products you sell me?
Are you required by law to act in my best interests at all times?
A “yes” to the first question constitutes a conflict of interest since the advisor must sell you investments to make a living. A “no” to the second question also leads to a potential conflict. We believe compensation should be free of all conflicts of interest.
As a fee-only advisor, Pittenger & Anderson favors full disclosure of all fees as well as any conflicts of interest. P&A is held to a fiduciary standard and is required to act in our client’s best interests at all times. Fee-based advisors are not held to a fiduciary standard of care but rather the vague notion of what is “appropriate” for the client. Since the majority of a fee-based advisor’s compensation comes from products they sell to clients, conflicts of interest are rampant in this type of relationship.
A fee-only advisor usually offers a better value to clients than a fee-based business model. Using no-load mutual funds, discounted commissions, and being cognizant of fund expense ratios allows P&A to save our clients money. We seek to reduce expenses to the client whenever possible.
If you’re looking for an advisor who fully discloses all fees, offers unbiased financial advice, and who always works in your best interests, then Pittenger & Anderson, a fee-only advisor, might be a good fit for you.
For a more detailed look at the differences between advisors, check out our paper entitled “What Price Advice?”
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