Fees: I believe a consumer’s most common understanding of this word is you will send a bill for your advice; the way accountants and lawyers typically do for their services. I may not know up front what I’ll be paying for my accounting or legal advice, but I will eventually, because I’ll get a bill.

When we, as financial advisors, say we earn fees we could mean more than one thing. We could be talking about sending a bill for services rendered. But in my experience, very few (I would estimate fewer than 10) fi- nancial advisory firms in Canada work this way, even though a number of firms position themselves (corporate brochure, Web site, advertisements) as fee-only. Indeed, such firms often earn, in addition to their billed hourly—or by engagement—financial advisory fees, what they may also characterize as fees in their role as, for example, a general partner in a limited partnership they recommend to clients. Even if this is disclosed, it is really a commission, since the advisor would never have received any money if the client hadn’t bought into the LP (in other words, was sold the LP).

Others who promote themselves as being fee-only may mean they receive trailer fees (asset-based) compensation, in whole or in part, for advisory work.

In an attempt to be (somewhat) more accurate, some firms and advisors receiving asset-based compensation/ trailer fees have taken to describing their approach as feebased. Firms that advertise their compensation this way are often hoping to be seen as more professional than an advisor who earns asset-based compensation or trailer fees—even though all three terms are synonymous!

The average client cannot possibly parse the words “fee,” “fee-only,” and “fee-based” and is thus unable to understand there may not be any real difference among these expressions. And what about referral fees? Some advisors receive these—in addition to what the client may be aware he/she is paying for advice and service. These may be in the form of shared compensation with, for example, a stockbroker to whom (some of) a client’s business is referred. Disclosed? Not always.

Commissions—Pretty clear what this means, but the percentage or dollar amount is often not disclosed (think insurance). If it were, clients would be better able to measure the value (advice, services) they are getting for any commissions imbedded in the financial products they may have purchased to execute (a part of) their financial strategy or plan.

What I propose is a financial advisory task force involving respected advisors from various sectors of the financial industry, including leaders of the FPSC, Advocis, CIFPs, IIROC, MFDA and IAFP to develop a common dictionary of advisor compensation terms that can then be easily understood by the average consumer.

Furthermore, members of, or registrants within, any of the aforementioned organizations who hold out as financial planners, advisors or similar terms should include their appropriate newly spelled-out compensation descriptions in an Engagement Letter signed by each new client. Such letters would also include the advisor’s qualifications (designations, relevant experience); and duty to their employer or firm (i.e. declare their potential conflict(s) of interest).

Clients should be aware of all the costs they’re paying— whether fees or commissions—for the advice and service they are getting. Only then can consumers readily compare the total costs versus the value they’re receiving.

This way, we can truly move financial advisors and planners to a place where they’re perceived as more forthright and transparent (and, consequently, more professional).

Originally published in Advisor's Edge