Should You Avoid Fee-Only Advisers?

At first blush the argument for using a fee-only adviser makes sense.

A fee-only financial adviser is someone who is compensated solely by the client. Neither the adviser nor any related party receives compensation that is contingent on the purchase or sale of a financial product. Fee-only advisers 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 adviser’s planning recommendations.

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

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

The problem with fee-only advisers

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

Let’s use Fixed Indexed Annuities (FIAs)

So should anyone giving financial-planning advice be familiar with FIAs with guaranteed income riders? Absolutely. To give retirement advice without knowing these products inside and out would be an outrage.

So will a “fee-only” adviser recommend an FIA to a client? I highly doubt it.

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

Real-world experience

never

I’ve talked with dozens of fee-only advisers and communicated with dozens more in somewhat nasty e-mail exchanges over the last 10 years. I’ve 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. That means they don’t do daily, weekly, monthly or even annual research on all the quality commission-based products in the market.

with guaranteed income riders as an example. In the market today, you can find FIAs that will guarantee a roll-up rate of return of between 6% to 8% for up to 20 years coupled with a guaranteed income for life of 5% to 6% for someone kicking in income at age 70.

Biases

While in theory the concept of using a fee-only adviser make sense (because they do not make money from commissions or sales loads), in reality, a fee-only adviser is one of the most biased advisers you can use (biased against commission based products).

You can use one at your own peril, but now at least you are forewarned.

Read more:

How to Compare Financial Advisor Fees

Do You Understand Your Investments?

Interview with a Financial Adviser Part One, Part Two

Advisers, Clients Not Always on the Same Page

Roccy DeFrancesco, JD, is author of

, and founder of

The Doctor's Wealth Preservation Guide

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“fee-only” advisers from Roccy’s book

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Bad Advisors

Because virtually all of the best fixed annuities and life insurance policies pay commissions, the chances of receiving the best advice on such products (which can be an integral part to a balanced and protected wealth building platform) from a fee-only adviser is slim to none.