What is the difference between fee based and fee only as a Registered Investment Advisor (RIA)?

I'm Brad Wales with Transition To RIA. This is video #31 of the Transition To RIA video series where I answer RIA related questions I get from advisors just like you. On today's video I explain the current debate regarding when/if you can call yourself "fee-only", or depending on your service offering, should you instead only be using a "fee-based" verbiage.

What I do: At Transition To RIA I help financial advisors understand everything there is to know about WHY and HOW to transition their practice to the Registered Investment Advisor (RIA) model.

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🔹 Transcription of video:

What is the difference between fee-based and fee-only? That is today’s question on the Transition To RIA video series. It is question #31.

Hi, I’m Brad Wales with Transition To RIA where I help advisors like you understand everything there is to know about why and how to transition to the RIA model.

Today’s question, it’s related to this whole idea of…kind of being in this fee-based or fee-only world, is this terminology. There’s a lot of chatter out there about this topic and conversation going on about….can you call yourself fee-only or fee-based? You might think we’re splitting hairs here, but I did want to go through some examples of some of the opinions and arguments that are out there and why you want to pay attention to this topic.

There is a lot of difference of opinion (on this topic). Some people would say this is a silly argument to even have. Others are very firm on why it should be one way or the other. I will tell you that these terms are so interchangeably used at times that I, even as I was preparing to make this video I think….”am I going to – I actually might do this – am I going to misspeak at some point during this video and use the wrong phrase when I was alluding to the other one?”

It’s a typical thing out there where these are interchangeably used. The thought is, should that not be the case? Should it be more defined of who and why and when you can use fee-based versus fee-only?

I would tell you this is not something all advisors are necessarily talking about or investors are talking about. Regulators though are talking about it, tossing this around (asking) is this a concern? As well as some credentialing bodies? I believe the CFP board has dove into it and is looking at it and asking….”what are we comfortable with or what are we not?”

There’s certainly a bigger conversation going on out there. So I did want to make a quick video here to go through this and things for you to be thinking through. If you were to go ahead and transition to that RIA model, what do you want to be prepared for from a verbiage standpoint?

The argument out there is that if you’re going to call yourself fee-only, you literally can only, by definition, receive fees. Nothing else. You might think to yourself….”well, yeah, of course I’m fee-only, if I start my own RIA.” One of the beauties of the RIA structure is it’s very clean with a client.

You say….”Client, you pay me the fee,” perhaps it’s 1% of the account value, “and that’s how I’m compensated. That’s the only way I’m compensated. It doesn’t matter what products or services we use, or how frequently we trade or don’t trade or anything like that. The only fee I receive is (for example) the 1% from you, that is it.” If that is truly your structure, then arguably, you can use that “fee-only” verbiage with how you put yourself out there.

However, I will tell you some advisors, they think….”Oh, I have an RIA so I’m fee-only.” But there are some examples to think through that maybe pulls you back from that scenario I described. I’ll give you two of them. I’ve done videos on both of these topics.

There is the ability as an RIA to also have a relationship with what are often referred to as RIA-friendly broker-dealers. I did a video on this. It’s video number 30. If you haven’t seen it, I encourage you to go look at it. It is possible to – even if the bulk of your business is going to be under the RIA – for a multitude of reasons, you might still want or need the ability to either offer commission products or be able to facilitate existing legacy products on an ongoing basis. Maybe you’re receiving trails or something like that. Con't....

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