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Why Fee Only?

By Chuck Stanley, CFP®

We all agree that advisors should be compensated for their efforts on behalf of their clients. The method of advisor compensation, its disclosure to the client, and whether it serves the client’s best interest are the factors that should be considered by any consumer prior to entering into an advisor-client relationship. 

It is important for a potential client to understand the different ways advisors, and their firms are compensated and how that impacts the clients’ investment returns.

Generally financial advisors are paid either by charging fees or earning commissions.

Commission-Only Advisors earn their income by selling financial products such as insurance or mutual funds, or may also earn a fee for trades that they execute.

Fee-Only Advisors earn their income by charging fees. Some common methods include an hourly rate, an annual or retainer fee or as a percentage of investments under management.

Fee-Based Advisors earn their income using a combination of fees and commissions.

Common Mutual Fund Investment Terms:

Loads:  A "load" is another term for a sales charge. Loads can be assessed to you in several different ways through your purchase of either an A class, B class or C class share of a particular mutual fund.

A class shares:  If you are buying an A class share there is an up-front sales charge (often referred to as a front end load) of usually around 5%, but can be as much as 8%. You may also be assessed an annual 12b-1 fee (see below).  

B class shares:  B class shares do not have an up-front charge, but require you to own the fund for a certain period of time, typically 5 to 7 years. If you wish to sell the fund before then, you will pay a sales charge (often referred to as a back end load or contingent deferred sales load) at that time. B class shares also typically have a higher annual 12b-1 fee than A class shares that lasts until the back end sales charge period ends. B class shares often convert to A class shares after the back end sales charge period ends.

C class shares:   C class (usually referred to as level load) shares usually have either a reduced or no up front or back end sales charge, but usually have a higher annual 12b-1fee that continues for as long as you hold the fund.

Institutional class shares: Institutional or “I” class shares have no front or back end sales charges and often feature lower annual fees than other classes of shares. Unfortunately these shares often are available only to investors who can commit a substantial amount of money to that fund. Your Financial Advisor may be able to provide you with access to these shares, at a lower contribution level, through their relationship with the firm where they custody client assets. We do provide our clients with access to Institutional shares, when available, through our institutional relationship with Charles Schwab, who is our broker dealer.

Expense Ratio: The expense ratio is the percentage of the total fund assets that is used to cover expenses. These include management fees, which are paid to the fund manager, and operating expenses.

12b-1 Fees: These are additional marketing and distribution fees that are added to a fund. These are included in the calculation of expense ratio and sometimes called a "hidden load." Often, a portion of these fees is used to compensate financial advisors, so this is an additional expense you may not be aware of. The greater your investments, the more these numbers affect your returns.

For more information on mutual funds fees and expenses check out the Investment Company Institute website at:  http://www.icifactbook.org/fb_sec5.html

Exchange Traded Funds (ETF’s):  ETF’s, while not a share class of a traditional mutual fund, is a security that tracks an index, commodity, or collection of assets. It is like a mutual fund in many ways, but differs from a mutual fund in that it trades on the equity market throughout the day, much like a stock. On average, ETF’s   have lower annual fees than mutual funds. You will pay a transaction fee, like a stock, to purchase an ETF.  

At Main Street Financial Solutions, LLC
we use "no-load" mutual funds and exchange traded funds.  Any transaction fee to purchase an investment that we recommend to our clients goes only to our custodian, Charles Schwab. We do not rely on sales charges or transaction fees for our compensation.  This allows us to remain objective and select investments that are in the best interest of fulfilling your personal financial goals. There are many advisors who offer their services to you for "free", but are really being compensated in a way that is unclear to you and this form of compensation may be detrimental your financial goals.

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