HISTORICAL VIEW
Why "Fee-Only" Matters
By Knut A. Rostad
For decades, the broker-dealer industry criticized Fee-Only advisers and planners for saying Fee-Only compensation is better for consumers than commissions. The financial services industry rebutted with talking points and rants. Fewer “choices” and greater costs were the staple replies.
The industry also poked fun, saying Fee-Only advisers busy themselves adjusting their halos. The joke backfired. Many consumers soon chose halos over conflicts of interest.
Misleading industry messaging remains central to the securities and insurance industries today. Its unintended consequences have increased the role of Fee-Only compensation.
Twenty years ago, securities brokers were clearly seen as product sellers, while today the same brokers hold out as best interest or fiduciary advisors. Today, Fee-Only is not just a transparent and consumer-preferred method of compensation; it is also the best verifiable hallmark of fiduciary planning and advice.
Fee-Only and Regulatory Development 1940–2025
The background of regulatory history matters. The beginnings of Fee-Only compensation in federal securities regulation start with the Investment Advisers Act of 1940 (Advisers Act). The legislative record reveals the nature of investment advice, the harms of conflicts, and differences that distinguish investment advisers (IAs) from broker-dealers (BDs).
This record shows how IAs of the time worried that “legitimate advisory organizations” were not differentiated by regulation in the marketplace from conflicted sales of “tipsters and touts.” Leading advisers in 1940 believed investment advice should be compensated by fees and advisers should not be in other businesses. Then in 1963, the Supreme Court recognized that IAs owed fiduciary duties under the Advisers Act.
This background highlights the sharp legal and business differences between IAs and BDs. In the 1990s, ignoring these differences, BD firms started advertising brokers as trusted advisors, without changing their legal or business duties. In June 2009, SEC Chair Mary Schapiro acknowledged the BD industry's marketing success. She said the broker-adviser “divide” was overstated and that the “two industries are merging to the point of, in some cases, relative indistinguishability.”
This statement ignited the battle between BDs and IAs for consumer approval and regulatory favor. Make no mistake, at the SEC and in the marketplace, BD muscle allowed securities firms the latitude to hold out as advisers while acting as sales reps. Consumer confusion was inevitable.
This battle between IAs and BDs has reshaped the status of Fee-Only. Twenty years ago, a sharp line separated IAs and BDs and Fee-Only compensation was subordinate to IA status. Today, lax regulation has erased much of this line and Fee-Only has new importance, serving to verify the adviser’s business is advice. Fee-Only can signify fiduciary advice.
Ironically, the opposite is not true. Claims of fiduciary status signify nothing. BDs often claim to offer trusted advice or be a fiduciary while complying with a BD sales standard. Fiduciary status today can be verified by an IA’s Fee-Only status. In this way, the roles of Fee-Only and fiduciary are now reversed.
Fee-Only Today—Signifying What the Crux of “Advice” Means: “Impartiality”
That Fee-Only is the hallmark of real fiduciary advice is buttressed by one of the most influential legal scholars on advice standards today, Arthur Laby, Rutgers University law professor.
Laby discusses the law and logic of “advice” in his paper, “Why brokers should be fiduciaries.” He notes the Oxford English Dictionary definition of advice: “to state one’s opinion as to the best course of action, to counsel, to make recommendations … (and) implicit in the ‘term’ is that the guidance given will be the best guidance for the recipient of the advice, tantamount to a best interest standard.”
Laby notes, “An advisor’s impartiality is implicit in the profession and the hallmark of advisor regulation.” He continues, noting an underlying concern of the crafters of the Advisers Act of 1940 was “the presence of tipsters who were disguising themselves as legitimate advisers,” and that advisers “have only services to sell (while) investment companies have securities to sell.”
This difference separates advisers and brokers. As Laby puts it, “Investment counsel would advise in a client’s best interest, whereas other securities professionals were trying to make a sale.”
Common Sense, Impartial Advice, and Fee-Only
Professor Laby’s bottom line: “When one advises another, he is purporting to provide independent, impartial information in the best interest of the recipient. This is common sense. … The propensity to rely on a disinterested adviser is illustrated by a venerable common law doctrine that distinguishes between advice given by a seller and advice given by one who holds himself out as disinterested.”
Laby makes a point that is rarely noted, that “common sense” tells us impartial advice is in the best interest of the recipient. (I call this “The Laby Rule.”) The Oxford dictionary says common sense is “good sense and sound judgment in practical matters.”
The battle over what is good advice has been waged for 85 years. History and law suggest the core of “good advice” is impartial advice. This is common sense. Consumers can affirm impartial advice by verifying they are working with a Fee-Only adviser.
Knut A. Rostad is founder and president of the Institute for the Fiduciary Standard, a not-for-profit formed in 2011 to advance fiduciary advice and planning through research, education, and analysis.
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