We recently received some great questions from several advisors about how a conversion to fee-based accounts would impact their businesses. Specifically, one advisor asked if he would be able to continue collecting mutual fund trails (i.e., 12b-1 fees) and keep managing stocks. This led to a discussion on the different business models advisors can use.
Advisors really have three choices when it comes to how they want to be structured. All three options have real implications on advisor compensation, licensing, regulation and firm affiliations.
For our purposes, we will group the three choices by compensation type. You can receive commissions only, fees only or both commissions and fees (which is commonly referred to as fee-based).
If you receive commissions, you need to be affiliated with a FINRA-registered Broker-Dealer and be properly licensed for the products you are selling. If you receive fees, you need to be affiliated with a Registered Investment Advisor (RIA). If you want to earn both commissions and fees, you need to be affiliated with both a Broker-Dealer and an RIA. A dually-registered Broker-Dealer/Investment Advisor would also allow you to earn either commissions, fees or both.
The table below compares the three types of compensation models and provides answers to our reader’s questions along with some additional information:
Comparison of Advisory Business Models
|Compensation Type||Commission||Commission & Fee||Fee|
|Standard of Care||Suitability||Suitability for commission accounts & Fiduciary for fee accounts||Fiduciary|
|Firm Affiliation||Broker-Dealer||Broker-Dealer & RIA||Registered Investment Advisor (RIA)|
|Regulator||FINRA||FINRA & SEC||SEC (or State)|
|Common Licenses||Series 6, Series 7 & Series 63||Series 7 & Series 66/65||Series 65|
|Can you collect mutual fund trails?||Yes||Yes||No|
|Can you earn commissions on stock trades?||Yes||Yes||No (but you could manage a stock portfolio for a fee)|
Fee-Based versus Fee-Only
While compensation is the main difference between the three business models, there are other reasons that each model may be preferred. Let’s look at the differences between fee-based and fee-only.
Being a fee-based advisor gives you the most flexibility when it comes to how you operate. You typically have access to the widest variety of investment product offerings and can switch between commissions and fees depending on the needs of your clients. This is the logical structure for someone that wants to transition to fee-based while being able to keep some of their existing commission relationships or who want to facilitate the occasional commissionable transaction.
Fee-only advisors have been growing in popularity over the past couple of decades as some advisors try to simplify their businesses and focus exclusively on planning and portfolio management.
Fee-only advisors like to say that they are always held to the fiduciary standard of care. The truth is that anytime you provide advice and collect a fee on an account, you are required to act as a fiduciary. The advantage for a fee-only advisor is that they never switch their roles between the different standards of care like a fee-based advisor may.
In very basic terms, a fee-based advisor will act under the suitability standard when doing a commission trade and then under the fiduciary standard when they open a fee account. Since a fee-only advisor only does fee business, they always are held to the fiduciary standard. Additionally, it should be noted that the SEC is reviewing a uniform standard of care that will potentially change these standards, but until then, this is the environment in which we operate.
The Choice is Yours
At the end of the day, if you want to offer your clients fee accounts, you need to use either the fee-based or fee-only business model. There are advantages and disadvantages to each, but both require you to be affiliated with an RIA, and both hold you to the fiduciary standard of care on fee accounts.
To evaluate which is right for you, think about your priorities, your clients’ goals and how you’d like to grow your business. The great thing is that you have choices when it comes to how you want to conduct your business.
If you have questions or want additional information about which model is right for you, please use our “contact us” feature, and we’ll be happy to help with your discovery process.