Fee-Only vs Fee-Based Financial Advisor: Which Is Better?

Fee-only advisors market themselves as the least biased advisors in the industry. Roccy DeFrancesco argues the opposite: he believes they are the most biased — against every product that pays a commission. This episode walks through his Fee-Only Advisors: The Good, the Bad, and the Ugly presentation, drawn from chapter six of his book Bad Advisors. What “fee-only” means: Fee-only advisors are paid only by their clients — usually an up-front planning fee and then a fee on the assets they manage. They can't accept commissions, so they can't sell life insurance, annuities, long-term care or disability coverage. Their trade group, the National Association of Personal Financial Advisors (NAPFA), requires members to work only within the fee-only model. NAPFA describes the model as the most transparent and objective way to pay an advisor, one that minimizes conflicts and ensures the planner acts as a fiduciary. Roccy says he has no problem with how they charge. His problem is the implied message: that any advisor who earns a commission is biased and can't be trusted. Roccy's case against fee-only advisors: “Fee-only” is marketing. Roccy says many fee-only advisors have told him privately that they chose the model because clients like it. He compares the pitch to a loaded question: would you rather work with a biased advisor or an unbiased one? No incentive to learn commission-based products. If an advisor can't earn anything on a product, Roccy asks, why would they learn it — or keep up as carriers change designs every month? He estimates there are around 300 fixed indexed annuities on the market. “Fiduciary” is a given, not a selling point. Speaking as an attorney, he notes every attorney and CPA is a fiduciary and doesn't advertise it. In his view, plenty of fiduciaries give bad advice and plenty of advisors who aren't fiduciaries give good advice. Referring clients to an insurance agent works against them. His example: a client with a $1 million IRA who would benefit from putting $500,000 in an annuity. Referring that client out cuts the fee-only advisor's revenue in half. Roccy says he has never seen it happen in more than 25 years. No-load products are thin. He says insurers have tried selling no-commission products directly to consumers and failed, because nobody is out there selling them. Most of the good products, in his view, pay commissions. The commission-based products Roccy says every advisor should know: Fixed indexed annuities. Market losses can't reduce your balance, and gains lock in each year up to a cap. Roccy puts realistic returns at 4% to 6%. His slide compares 10 years of a 9% cap product at about 7.14% (in a strong market) with a bond index at about 1.37% that dropped as much as 17% along the way. He says fee-only advisors typically use bonds to hedge market risk instead. Guaranteed income riders. His example: a couple aged 55 and 54 put $500,000 into an income rider annuity and wait until age 66. The guaranteed joint lifetime income is $161,948 a year — an 8% roll-up rate and a 7.1% payment rate. A single 55-year-old gets $172,714, a 7.6% payment rate. He says these products are better now than they've been in 30 years. Indexed universal life (IUL). Market losses can't reduce your cash value, gains lock in, the cash grows tax-free and can come out tax-free, and there's no age 59½ rule. He suggests waiting 10 to 15 years before tapping the cash, and calls IUL a viable option for certain clients under 55. His slide shows a 12% cap product averaging over 8% for the last 10 years. Long-term care. Private-pay nursing homes run about $120,000 to $125,000 a year today, Roccy says. Options include traditional policies, asset-based long-term care with a return-of-premium rider, annuities with long-term care benefits, and the Immediate Care Plan for people already in a nursing home (covered in episode 6). Disability, life insurance and final expense coverage. What Roccy recommends instead: a fee-based advisor. A fee-based advisor can charge a fee to manage your money and sell commission-based products when they fit. They're also fiduciaries. Roccy thinks they're far more likely to recommend these products when appropriate, and calls the worry about their incentives “hollow,” since they earn a management fee either way — sometimes more than a commission. Questions to ask your advisor: Are you a fee-only or fee-based advisor? Do you help clients with long-term care solutions? Do you know what a fixed indexed annuity is? Do you know what an indexed universal life policy is? Do you regularly research these products to stay current on the best ones? Have you ever recommended them to a client? Would you recommend one to me if you thought it was the best way for me to grow wealth while protecting it? Roccy's advice: if the answer to the first question is “fee-only,” walk away. And even with a fee-based advisor, ask the last two questions — many know the products but never use them. Resources mentioned: Roccy points to “the link at the bottom of this video” for his 24-page white paper, Income for Life for the Affluent and the Non-Affluent. For audio listeners, email [email protected] to request a copy. Download Bad Advisors free at badadvisors.com. Chapter six covers fee-only advisors. feeonlyadvisors.net — Roccy's consumer site on why he believes people should avoid fee-only advisors. Free second opinion. If you're using or considering a fee-only advisor, Roccy offers to review their recommendations and says he usually doesn't charge for it. Contact [email protected] or 269-216-9978. Disclosure: Roccy is an attorney, financial planner and insurance agent. He co-founded an insurance marketing organization that earns money when independent agents sell life insurance and annuities, and his firms run a registered investment advisory business that charges asset management fees. He also runs feeonlyadvisors.net. Every characterization of fee-only advisors and NAPFA in this episode — including calling fee-only advisors the most biased and least knowledgeable in the industry and comparing the fee-only community to a cult — is Roccy's own opinion. Returns and income figures come from his slides, reflect particular products and time periods, and aren't guaranteed for any product you might buy. NAPFA hasn't responded to these claims. Nothing here is legal, tax or investment advice. Questions, or a topic you want covered? Reach out.