Although they sound similar, the terms "fee only" and "fee based" have very different meanings when they pertain to giving financial advice. Here, expert Bryce Sanders offers some relevant history as well as a detailed explanation of why the answer to this simple question is anything but.
The title poses a simple question. Unfortunately, the answer is less simple. In short: It depends on who is paying you. Before explaining more, it’s helpful to know some financial planning history.
May 1st is known as May Day. In 1975, it also went into the history books as the day fixed commissions were abolished in the US stock brokerage world, opening the door to discount brokerage firms and other forms of price competition. Forty-six years later, commissions to buy and sell stocks at major firms have largely disappeared, replaced by a fee structure instead. What does this mean?
To understand how two similar terms, fee-only and fee-based, can have significantly different meanings, we need to fill in some of those 46 years first. Prior to May 1st, 1975, stock brokerage commissions were fixed, similar to US airline ticket fares at the time. There were lots of small brokerage firms, many with in-house research departments funded by the profit margins fixed commissions delivered.
As price competition brought commissions down, major brokerage firms moved to a fee-based pricing system. Clients were charged a percentage of their assets under management instead of a commission whenever they bought or sold securities. This is how the financial planning profession had been operating for years, within their fiduciary capacity. Fee-based pricing also removed the perceived conflict of interest when the financial advisor recommending each trade is also earning their living by the amount of trading revenue they generate.
Around this time, large brokerage firms started offering financial planning services. It benefitted the client, as the financial planning profession had been doing for years, yet it also opened up many other business opportunities for financial advisors. Insurance is one example. It also made a compelling case for a client to consolidate multiple investment accounts at one firm.
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