National Association of Personal Financial Advisors - Fee-Only

Fee-Only

NAPFA defines a "Fee-Only" financial advisor as one who is compensated solely by the client, with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product. This definition is in direct contrast to most advisors, who earn commissions, discounts, and other incentives when their clients purchase financial products. Also, unlike other financial planners, NAPFA members are required to clearly disclose the fee in advance.

However, NAPFA members differ on how they charge the fee. Some advisors charge an hourly rate, similar to an attorney or CPA. Rates vary by region of the country and an advisor's experience level and expertise. Some advisors charge a retainer fee schedule that is paid quarterly or annually. Other advisors charge based upon a percentage of the client's assets under management, such as a 1% fee on the assets per year. Regardless, the fee must be made clear to the client.

NAPFA does not permit its members to be compensated via the industry-standard 12b-1 sales & marketing expense fees for mutual funds. From NAPFA's perspective, there are two problems with these fees: undermined objectivity and inadequate disclosure.

• Objectivity: A mutual fund pays 12b-1 fees directly to the selling broker-dealer, to be shared with the selling broker. This violates NAPFA's rules—though it is neither illegal nor unusual—and it potentially could influence an advisor's recommendation about selection of a fund.

• Disclosure: NAPFA has written to the Securities and Exchange Commission (SEC) to explain that the fees are removed from the clients' assets without notice or invoice to the client, are not reported on their investment statements, and are generally invisible to the client except through reduced investment returns. In 2010, the SEC adopted rules to improve disclosure of 12b-1 fees.

NAPFA has prepared a short report that compares how advisors are compensated. It can be found on NAPFA's website at www.napfa.org, under the link for Consumers.