Skip Schweiss recently wrote an article entitled “DOL Rule Means Lots Of Homework This Year ” for the latest issue of Financial Advisor Magazine in which he completely confused what it means to be a fee-only advisor.

In writing about new Department of Labor regulations on financial firms, he wrote that “Many ‘fee-only’ RIAs may believe they have no conflicts when recommending investments, yet there are some scenarios that might now be interpreted as conflicts.” He gives two telling examples:

You recommend third-party managers who share part of their revenue with your firm. Those managers charge different fees and may share part of those differing fees with you, possibly resulting in a conflict…

You received trailing “12b-1” fees from mutual funds sold to an investor when you were serving as a broker, and those positions are now held in an advisory account with your firm and you are still receiving the fees. You can affect your compensation by recommending a change to the portfolio.

“Fee-only” means just what it says: as an investment manager, your entire salary is paid by direct management fees. If you collect revenue from a third-party manager, you are not a fee-only advisor. If you receive trailing 12b-1 fees from mutual funds, you are not a fee-only advisor.

This is a basic mistake and saddening to see from Skip Schweiss, who is the Managing Director of Advisor Advocacy and Industry Affairs for TD Ameritrade Institutional and the President of TD Ameritrade Institutional’s Retirement Plan Solutions for TD Ameritrade Trust Co. He should know better than to make this mistake.

But there are investment management firms whose business structure rewards them for doing business in a way that does not serve their clients’ best interests. These firms call themselves “fee-based” to confuse the matter by sounding like “fee-only” advisors who have designed their business to only profit when their clients do. It is discouraging to see that it worked on Skip Schweiss, who believes “fee-only” firms could have the same conflicts of interest that plague “fee-based firms.” It is more discouraging to see such a mistake published by Financial Advisor Magazine.

The NAPFA fiduciary oath makes clear that the term “fee-only” applies to a high ideal:

The advisor, or any party in which the advisor has a financial interest, does not receive any compensation or other remuneration that is contingent on any client’s purchase or sale of a financial product.

The advisor does not receive a fee or other compensation from another party based on the referral of a client or the client’s business.

Or as we have written in our 2016 descriptive brochure:

As fee-only financial planners, we receive no other form of compensation.

We believe this policy helps mitigate the conflict of interests inherent when a firm receives compensation based on the sale of specific securities or investment products. We do not receive any payments or commissions from fund or insurance companies. Our only compensation is from the clients we serve.

It should be clear that “fee-only” means “fee-only,” not “fees and third-party manager revenue-sharing and trailing mutual fund fees.” “Fee-only” firms should never be confused with the types of firms that invite conflicts of interest as a matter of course.

You deserve better than the firms that really do need to pay attention to Schweiss’ article.

Photo used here under Flickr Creative Commons.