Fee-Only Versus Fee-Based – Conflicts Of Interest And The Fiduciary Standard


Financial advisers can be paid in multiple ways, performance fees, hourly fees, on-going management fees, or through commissions earned by selling products. Performance Fee-Only planning has gained in popularity in the last few years because of its transparent compensation structure and because it removes the conflict of interest associated with selling a commission based product. This means more expat clients are switching to these types of advisers. In response, many commission based advisers have attempted to get their share of the market back by offering fee-based planning in addition their commission based practice.

So let's take a look at what "Performance Fee-Only" financial adviser are and why it is so important. First off, they are never paid a commission. An adviser compensated through commissions inherently faces a conflict of interest between the interests of the expat client and that of the financial professional. These commissions provide an incentive to sell products with the highest payout to the advisor (e.g. loaded mutual funds, life insurance vehicles like the "offshore bond" and "offshore savings plan", variable annuities, whole life insurance) regardless of whether or not this is the best option for the client. "Performance Fee-Only" advisers are paid based on the fact IF F the agreed annual return of the client's portfolio is achieved. This aligns the adviser's goals with those of the client, which is to grow a client's wealth. But the real difference comes from the Fiduciary Standard. Performance Fee-Only financial registered advisers are held to this standard, which means by law, they must have their clients' best interest at heart. Therefore, Performance Fee-Only advisers will recommend the best investments for a client not the ones with the highest commissions payout.

Because of the obvious popularity of this model, commission based advisers have started adding "Fee-Based" as an option to their clients. Do not be confused. This means that some of their compensation comes directly from their clients as fees, but not all. They still sell financial products to their clients for commissions or accept referral fees to refer their clients to other professionals.

With these conflicts of interest in place a financial plan becomes just another "sales pitch". After analysing an expat's cash flows an adviser will "show" the client how they need more insurance, which they can conveniently sell to them.

Also, an adviser who earns commissions by selling products has the incentive to sell more products. Therefore, if the adviser has to meet their sales goals for the month, all they need to do is come up with a reason to sell one fund and then purchase a new one generating more commissions.

If you are ready for an objective relationship with a financial adviser, please contact us at info@expatwealthatwork.com