Fee-only, fee-based, commission. The fight over how your adviser is paid

The first reaction from inside

Fourteen years after the profession was founded by sellers, some of its members concluded that selling was the problem. In 1982 a group met in Atlanta. In February 1983 an invitation went out to anyone interested in running a firm paid only by the client, and "more than 125 people responded".¹ Their stated reason was that "accepting commissions for the sales of financial products was putting them in direct conflict with the best interests of their clients".¹ The National Association of Personal Financial Advisors was the result.

Its definition of fee-only is strict: compensated solely by the client, with no compensation of any kind contingent on the purchase or sale of a product.¹ The association had about 3,500 members in 2018 and more than 4,400 in 2024, against more than 100,000 holders of the CFP mark.² Two of its past presidents were later prosecuted for fraud, one ordered to repay $1.66 million and one sentenced to sixteen years.² Fee-only removes one conflict. It does not remove the person.

What the textbook said

By 2001 the standard college textbook was blunt about the rest of the profession. "500,000 people call themselves financial planners, although many are really nothing more than salespersons." It gave the shares: about 31 percent of planners paid by commission only, 43 percent by a mix of fees and commissions. It worked an example: an 8.5 percent commission taking $850 from a $10,000 fund purchase. It called fee-only planners "free of potential conflicts of interest", and then warned that "advertisements touting 'fee only' have no meaning whatsoever", because anyone could use the words.³

That is a textbook telling students that most of the profession is sales, and that the label meant to distinguish the rest is unregulated.

The rule that lasted two years

The federal government tried once to settle the question by law. In April 2016 the Department of Labor issued a rule requiring anyone advising on retirement accounts to act as a fiduciary, a legal duty to put the client's interest first. Industry groups sued. On 15 March 2018 the Fifth Circuit Court of Appeals held the rule invalid by two votes to one, and on 21 June 2018 it was vacated.⁴

In its place the Securities and Exchange Commission adopted Regulation Best Interest on 5 June 2019, in force from 30 June 2020. It "enhances broker-dealer obligations beyond suitability" and leaves advisers' existing fiduciary duty as it was.⁵ A broker must now act in the customer's best interest. What "best interest" requires is the subject of the rule's 770 pages, and it is not the fiduciary standard the 2016 rule had imposed.

What the fight has produced

Forty years after 1983, a client can find a fee-only adviser, and the label is now policed by the fee-only association if not by law. A client can also find a commission-paid adviser, a fee-based one, and a broker under a best-interest standard that a court declined to make a fiduciary one. The client is expected to know which is which, and the textbook's warning about the words still applies.

This is the shape of every reform in the field. The harm was named by insiders. The remedy was a label and a voluntary association. The legal fix was fought by the industry and cut back. The household is left to read the label.