A Tipping Point for the Fee-Based Movement – The American Funds Transition

The fee vs. commission debate has been exhaustive. We’ve seen countless articles, debates, and surveys featured in our email newsletters. But is there any clarity on where the industry is actually going?

We looked toward the recent transition of one of our industry’s largest commission-based players, American Funds, to shed light on the overall fee-based movement.

“Fee-based” and “Fee-only” have become the latest marketing buzzwords in the financial advice industry. Advertising a focus on fees is the newest avenue used to convey a focus on the customer.

Conversely, we’ve seen studies and opinion pieces that detail the lack of alignment to the true wants of the investor. A great example is the recent J.D. Power Full Service Investor Satisfaction Study, which analyzed the opinions of investors currently engaged in a commission-based fee structure. The results seemingly indicate a reluctance to transition to a fee-based model, especially among high-net-worth clients.

There are camps on both sides of this story. But the real question isn’t what we prefer, but where the industry is headed – long-term.

American Funds, one of the major advisor-only, commission-based, trail-based firms recently began a firm-wide push to offer models of their funds on fee-based platforms. Along with this seminal change was the inclusion of less expensive share classes to fund these models.

Why is this such a big deal?

Being a long-time advocate of the fee-based model, I remember meeting with American Funds a decade ago to discuss the benefits of an alternative service model. With little traction, I quickly learned that they held strongly to their commission-based identity, and that they wouldn’t entertain (even slightly) a deviation away from that core belief.

Fast forward to today, and American Funds is our newest third-party investment strategist – with a Morningstar Stewardship Grade of A* – providing six fee-based model portfolios for our advisors.

The recent transition indicates a realization that the fee-based push isn’t a trend, but a long-term development. It not only further legitimizes the fee-based service model, but validates it as the future standard of our industry.

Welcome to the party!

*Morningstar, October 2015


The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this commentary is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. FTJ FundChoice does not guarantee any minimum level of investment performance or success of any index portfolio or investment strategy. Past performance is not indicative of future results. Information obtained from third party sources are believed to be reliable but not guaranteed. FTJ FundChoice makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.