This month’s edition of “Advisors Magazine” quotes Josh Reidinger of Warren Averett Asset Management about the advantages of fee-only advisors and the pitfalls of commission and fee-based advisors. The article comes in light of the Securities and Exchange Commission’s silence concerning what is commonly known as the “fiduciary rule,” which is geared toward increasing transparency and protecting an investor’s best interest.
Fee-only advisors, like Warren Averett Asset Management, are paid a fee “for investment advice or a percentage of assets under management.” They are registered investment advisors who act as a fiduciary, meaning they put their clients’ objectives and interests first. Because fee-only advisors cannot sell financial products that go against their clients’ needs, they are positioned to offer more impartial and holistic advice, which helps keep conflicts of interest to a minimum.
Commission-based advisors are paid commissions based on the investors’ transactions and/or the number of accounts the advisors open. Similar to fee-based advisors, commission-based, or non-fiduciary, advisors abide by the suitability rule, which is a standard that guides them to advise investors subjectively. They are not required to legally put their clients’ investment needs and objectives first, nor are they required to disclose conflicts of interest.
Though terminology can be seemingly similar, fee-only advisors versus commission and fee-based advisors are quite different, not only in the way that an advisor is compensated but also in the way that an investor receives guidance. In the “Advisors Magazine” article, Reidinger weighs in on which option is better for investors:
“‘Somebody paid on commissions can’t be a fiduciary. I don’t see how,’ said Joshua L. Reidinger, CPA, member, president, and senior client consultant for Warren Averett Asset Management. Reidinger added, during a phone interview, that he has recently seen firms selling proprietary products describing themselves as a fiduciary, a problem he described as ‘disappointing’ and potentially harmful to investors. ‘I’m not casting all non-fiduciaries in a certain light, but I think [fiduciary] is a better solution for clients, I really do.’”
The discussion surrounding the difference between the two types of advisors has gained even more traction with the SEC’s statements in April and speculation about the regulations to come. Many expect more regulations to apply to commission and fee-based advisors in the future, which is sparking even more conversations.
The article ends with Reidinger’s thoughts on the importance of keeping clients’ interests first, even if it means lower compensation for the advisory firm:
“Fiduciary firms’ fee-only model also foregoes considerable earnings to keep clients’ best interests front and center. ‘Fiduciaries can only charge fees,’ Reidinger said. ‘If you follow the dollars, generally speaking, there is money being left on the table to be a fiduciary.’”
You can read the “Advisors Magazine” article in its entirety here (see pages 22 – 24).