Are fee-only advisors bad for our industry?Article added by Roccy DeFrancesco on April 30, 2012
Roccy Defrancesco

Roccy DeFrancesco


Joined: May 24, 2006

Let me ask the million dollar question for this article: Will a fee-only advisor recommend an FIA to a client? Answer: I highly doubt it.

What is a “fee-only” advisor?

A fee-only financial advisor is one who is compensated solely by the client, with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product.

Fee-only advisors may not receive commissions, rebates, awards, finder’s fees, bonuses or other forms of compensation from others as a result of a client’s implementation of the advisor’s planning recommendations.

The sales pitch

At first blush, the sales pitch of using a fee-only advisor sounds like it makes sense.

Wouldn’t it be better to use an advisor who isn’t biased because they can make money from commissions or other types of fees paid when a client invests money somewhere?

I mean, if an advisor could choose between a loaded mutual fund or one that’s not, wouldn’t the advisor always choose the loaded fund because he/she can make more money? Wouldn’t it be better to work with an advisor who could seek out no-load life insurance or annuities instead of ones that pay commissions?

The problem with fee-only advisors

While in theory, the concept of an unbiased advisor makes sense to me, I believe fee-only advisors are far from unbiased. Every fee-only advisor I’ve talked with is extremely biased against commission-based products.

Let’s use fixed indexed annuities with guaranteed income riders as an example. I've explained the math behind using FIAs as a retirement tool elsewhere. In the market today, you can find FIAs that will guarantee a roll-up rate of return of between 6 percent and 8 percent for up to 20 years coupled with a guaranteed income for life of 5 percent to 5.5 percent for someone kicking in income at age 70.

Let me ask an objective question: Should anyone giving financial planning advice be familiar with FIAs with GIB riders? Answer: Absolutely. To give retirement advice without knowing these products inside and out would be an outrage.

Let me ask the million dollar question for this article: Will a fee-only advisor recommend an FIA to a client? Answer: I highly doubt it.

Why do I highly doubt it? Because fee-only advisors have no reason to learn about FIAs. Why? Because they really can’t recommend them because FIAs pay commissions. While fee-only advisors could recommend FIAs, they’d have to charge the client a fee to give the advice. Why is that bad? Because, if the client would have purchased the FIA from an advisor who could earn commissions, there would be no additional fee.

My real-world experience

I’ve talked with dozens of fee-only advisors and communicated with dozens more in somewhat nasty email exchanges over the last 10 years. I’ve never communicated with one who knew anything about FIAs. Their opinion of FIAs was all the same: It’s a commission-based product and is either no good or not one they even know anything about because they don’t do much, if any, research on products they can’t recommend (meaning they don’t do daily, weekly, monthl, or even annual research on all the quality commission-based products in the market).

I strongly advocate you make a comment either supporting my position or telling me why I’m wrong. If I’m so moved by the comments that I think I need to change my position on why I think fee-only advisors are bad for our industry, I will gladly run a follow-up article stating as much.
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