Commissions or Fee-Only!

Here’s a great article written by Stephen Kelley regarding fee-only and commission paid advisors.  I thinks it’s a great article.

Now About My “Obscene” Commissions

Published Saturday, July 23, 2016 by Stephen Kelley

I recently read a column about annuities on is fairly typical of the trashing most media

types and “fee-only” advisers like to dish. As is frequently the case, it was filled with lots of

hyperbole and character attacks on annuities and the insurance companies and agents who sell


I believe this to be a terrible disservice. Not to me and other agents, but to people who might

otherwise consider a retirement strategy that may keep their money safe and guarantee lifetime


In his bio, the author wrote the following: “I write about investments, retirement and related

financial topics. I am the founder and principal of a NAPFA fee-only registered investment adviser

with more than $600 million of assets under management.”

He went on to trash annuities, writing, among other things, the following: “Because the business

is highly profitable, and the product difficult to sell, insurance companies pay obscenely high


Honestly, I am so bored by this topic, which has been repeatedly debunked. However it’s in the

news again with the new Department of Labor ruling, which seeks to make everyone “fee-only.”

To set the record straight, I felt the need to respond. With the intent of being as educated as

possible, I went to the site and searched on “What is fee-only.” There were several

models listed, including hourly, retainer and, lo and behold, assets-under-management fees.

So the post’s author (let’s just call him “Mr. Noble” to keep it easy), could charge a wrap fee on his

$600 million assets under management, or an hourly rate, and either are sanctioned by NAPFA.

Do the math. A 1% wrap fee would net him $6 million a year. In order to receive that much on an

hourly basis, he’d have to charge $2,884 per hour. If he charged a more reasonable $200 an hour,

he’d be limited to about $400,000 a year. Which do you think he does?

Tell me, please, how could two such diverse and totally contradictory models be sanctioned by the

same organization in the same category as “fee only”?

Now Mr. Noble is going to charge between 1% and 2% on a $10,000 investment every year, for

as long as you own the investment, on the full value of the investment, out of YOUR pocket. Mr.

Noble is going to tell you that it puts his interests in line with yours, because the better he does

with your investments, the more he makes.

Question: How is charging you a fee, when you lose money, aligned with your best interest? Maybe

if the wrap fee was tied to gains, I could buy it. But that fee is going to be charged whether you

make money or not.

Further, I have always questioned the notion that something tied to volume of sales should be

called a fee and not a commission. In my mind, fees are charged for services rendered, not volume

sold. In the example above, the $200-per-hour fee truly is one. But the 1% of assets held? That

sounds much more like a commission to me.

So I started thinking about commissions and fees. The only thing I could think of, within this

context, is a fee is paid by the client on an ongoing basis. A commission is typically paid by the

seller, once when a sale is made, based on the amount or quantity of the thing being sold.

Here’s an example. You hire a Realtor to sell your house. He does a lot of work, shows it to a lot

of people, and when it’s sold, he gets a fee. Right? And because the same amount of work goes

into selling a $1 million home as goes into selling a $250,000 home, he gets the same amount for

each. Right? Because it’s a fee.

Oh, wait. It’s not a fee. It’s a commission. It’s a percentage of what’s sold, paid by the seller. Once,

when the item is sold.

However a wrap fee is a percentage of what’s sold, paid by the buyer, year after year after year.

What’s the difference? YOU pay it FOREVER, making it a fee, not a commission. Framed this

way, would you prefer a fee-based product that you have to pay or a commission-based product

where the insurance company pays?

According to many sources, the average mutual-fund fee is anywhere from 1% to as much as 5%.

The average wrap fee is 1%. Don’t take my word for it, just Google “mutual-fund fees.” It’s an eye-

So let’s just assume you put $10,000 in an investment and keep it over 40 years, incorporating both

accumulation and distributions periods and earning an average of 7% which is what Wall Street

likes to claim. Let’s also assume total fees of 2.5%, certainly a reasonable assumption.

After 10 years without fees, the fund balance would be $19,671, after 20 years, $38,696, after 30

years, $76,122 and after 40 years, $149,744. With fees, those numbers are $15,529, $24,117,

$37,453, and $58,163, respectively.

That means the cost of the fees to the client is $4,142 after just 10 years. At 20 years it’s $14,579.

At 30 years, fees have taken $38,669. By year 40, $91,580 has been removed from your account,

leaving just $58,163.

What is the obscenely high commission on an average annuity for this investing lifetime? It’s about

$600-$700, or 1.2% of the so much more ethical wrap “fee.”

So I ask you, what incentive does Mr. Noble have to promote annuities? Right. None whatsoever.

As mentioned earlier, the Department of Labor fiduciary rule primarily targeted the commission-
based products, maintaining that someone who earns $600 to $700 is more susceptible to corruption and conflicts of interest than someone making $58,163. On what planet?