David M Zolt writes in his article “Industry needs to rid itself of misleading labels ” that “profound misrepresentation is just one of the many ways the financial services field misleads customers with language.” It is absolutely true. He explains:
Another highly misleading label is “fee-based.” As a fee-only, comprehensive financial planner, when I ask prospective clients how and why they chose me, many of them say it’s because I’m fee-based. These are people who have done their homework and have concluded that it’s in their best interest to hire someone who is not a salesperson pushing product, but rather an unbiased professional whose compensation does not in any way depend on how and where clients ultimately decide to invest their life savings. Yet based on their research, they still don’t understand the very important distinction between fee-only and fee-based.
I urge the profession, if it aspires to be a profession, to adopt the term “fee-and-commission based” for practitioners who charge both. Further, financial practitioners should be required to disclose the percentages of their income derived from fees and from commissions. And to avoid confusion, use of the term fee-based should be prohibited.
Do I think these recommendations will be adopted? No, I’m not naïve. Financial interests trump the truth. And I’m not talking about the financial interests of the client here.
We have written extensively on how the term “fee-based” was created specifically to confuse consumers and sound more like “fee-only.” And we have written about how you may think you are getting “advice for free” or for less when you are actually paying a number of hidden fees and expenses. We have quoted the Securities and Exchange Commission (SEC) on how investment advisers get paid and how to tell if your financial advisor is really “fee-only”. We have also quoted the CFP Board on the importance of CFP professionals accurately disclosing any conflicts of interest which make an advisor not strictly “fee-only.” And we have quoted PBS Newshour on how to find a financial advisor, step by step, looking for a fee-only fiduciary.
We have even written extensively on what it means to be a fee-only fiduciary and the ten questions you should ask any prospective financial advisor because we know that consumers are confused about compensation and standards of care.
Many in the financial services media have tried to clarify the benefits of their services to consumers, but others seem to purposefully fill media messages with confusing statements. Take this study done by the Cerulli Associates as an example. They asked investors how they prefer to pay their advisors. They gave them four choices:
- (a) commissions
- (b) a fee based on assets
- (c) retainer fees
- (d) hourly
The survey resulted in the following response:
- 47% (a) commissions
- 27% (b) a fee based on assets
- 18% (c) retainer fees
- 8% (d) hourly
The headline put out by the financial services industry was “Fee vs. commission: No doubt which investors prefer ” along with the subtitle “A new survey by Cerulli Associates asked investors whether they prefer paying fees or commissions to their advisers. The result? It wasn’t even close.” They concluded that investors prefer paying commissions, making it sound like investors prefer commission-based salesman with conflicts of interest to fiduciaries.
But answers (b), (c), and (d) are all also methods of paying a fee-only advisor. When you add the answers together, the survey can be interpreted as showing investors preferring fee-only compensation by 53% to 47%. And it’s not surprising that 47% prefer paying by commission since many investors mistakenly believe that someone else pays the fee that they are paying. Ellen Turf, CEO of the National Association of Personal Financial Advisors shared the same opinion in that very article:
Investors who say they prefer commissions may not realize how much they’re paying in terms of dollars. I think it’s a psychological thing. I think the average consumer really doesn’t understand.
Michael Kitces wrote an article called “Fees And Fiduciary: Good Business, Bad Marketing ” bemoaning this confusion. He suggested that while consumers should seek advice from fee-only fiduciaries, fee-only fiduciaries might benefit by not describing themselves that way. He suggests that any discussion of fees has a strong negative connotation with consumers and that “fiduciary” is simply confusing as a word.
But “fee-only” and “fiduciary” are the two legal terms that differentiate a client-centered business model from a commission-based compensation, which is not even legal in many countries.
We think an educated consumer will make better decisions. Language matters because businesses aren’t allowed to outright lie to their customers. Paying attention to how they market themselves tells you how they will treat you as a client. Stay away from businesses that will profit by keeping you in the dark and consider the fiduciaries who are legally required to act in your best interests.
Photo used here under Flickr Creative Commons.