Fee-Only

Marston Financial advertises itself as a FEE-ONLY advisory firm. Its advisory clients pay an asset-based fee, and two of its three principals are also licensed insurance agents who earn commissions when advisory clients purchase annuities and life insurance the firm recommends. The firm argues the label is accurate because no commissions are earned on the advisory accounts themselves.

1. A.The label is misleading, and the firm must stop selling insurance to advisory clients to remedy the violationNothing prohibits earning both forms of compensation with proper disclosure. What must change is the label, not necessarily the business model.
2. B.The label is accurate, since the advisory accounts themselves generate only asset-based feesThe claim describes the firm compensation model, not one account. A reasonable client hearing fee-only understands there are no commissions anywhere in the relationship.
3. C.The label is accurate provided the insurance commissions are disclosed in the brochureDisclosure is required, but it does not cure a misleading label. The firm should describe itself accurately as fee-based and disclose the conflict.
4. D.The label is misleading, because fee-only requires that the firm and its associated persons receive no third-party compensation on anything they recommendCorrect. Commissions earned by the principals on recommended insurance products defeat the fee-only claim regardless of which account they arise in.

Why: Fee-only means the firm and its associated persons receive compensation solely from clients and receive no commissions, referral fees, or other third-party compensation from any source in connection with the products or services recommended. Insurance commissions earned by the principals on recommendations made to advisory clients defeat the label entirely. The accurate description is fee-based, and the arrangement must be disclosed as a conflict.

A fee-only adviser recommends a plan that matches the client's goals with no commission products. This is:

1. A.A violationThere is no duty left unsatisfied in this fact pattern. Working without commission products removes a conflict from the relationship rather than introducing one.
2. B.ProperCorrect - aligned with client goals.
3. C.ChurningChurning is driven by transaction-based compensation, and a fee-only adviser earns none. With no commissions and no trading described, the economic engine behind churning is simply absent.
4. D.FraudThe compensation model is stated openly and the plan tracks the goals the client expressed. Fraud needs a hidden or false fact, and neither appears here.

Why: A suitable, conflict-light fee-only recommendation is proper.

Sixty-two-year-old Renata Ochoa asks whether to leave $740,000 in her former employer's 401(k), where total costs run about 0.28% a year, or roll it to an IRA managed by her adviser for 1.05% a year. The adviser recommends the rollover. To meet the duty of care, the adviser must:

1. A.Recommend the lower-cost option, because a fiduciary must always choose the least expensive alternative availableCost is a major factor but not the only one. Broader investment choice, planning services, or consolidation can justify a higher fee if documented.
2. B.Document a comparison of costs, investment options, and services and show a reasoned basis that the rollover serves the client despite the higher feeCorrect. The adviser must be able to show the analysis behind the recommendation, not merely that the client was told the fee.
3. C.Disclose the fee difference in writing, after which the client's informed consent satisfies the obligationConsent addresses the conflict of interest. It does not supply the reasonable basis the duty of care demands.
4. D.Obtain the former employer plan's written consent before recommending that assets leave the planNo plan consent is required for a participant-directed distribution, so this invents a step that does not exist.

Why: A rollover recommendation is an investment recommendation, and because the adviser earns a fee only if the assets move, it carries a built-in conflict. The duty of care requires a documented comparison of the two options on costs, available investments, services, and other relevant features, and a demonstrated basis for concluding the rollover is in the client's interest despite costing roughly four times as much. The clue is the large and explicit fee differential. Review rollover recommendations and the duty of care.