Choosing between a commission-based or fee-based financial advisor is a complicated decision. Various personal finance authors say to stay away from commission-based advisors, while others advise individuals to avoid fee-based advisors.
Our simple commission vs. fee-based advisor comparison will cut through the confusion and clearly explain each fee structure and how to help you decide which option is the best for maximizing your investments.
Commission-based Financial Advisors
Financial advisors who work on commission receive payment when they sell a product or service to a client, such as insurance, stocks or a mutual fund. This payment arrangement may lead you to believe that commission-based financial advisors act in their self-interest to earn more at the expense of helping grow your assets, but advisors who are operating as fiduciaries must put their clients’ interests first. Some financial advisors are fiduciaries, while others are required by law to only sell products suitable for a client’s needs. What is considered appropriate varies from professional to professional, so be sure a commission-based advisor clearly understands your objectives for managing your money.
Financial advisor commissions are paid by the companies providing the products the advisor sells to manage your assets, such as banks, brokerages and other financial institutions. Advisors must disclose commissions or bonuses by providing a Best Interest Contract Exemption (BICE) to clients. Typical sources of financial advisor commissions are:
- Newly opened savings or investment accounts
- Mutual fund loads
- Insurance policies
- Annuities sales
- Surrender fees for closing an account
- 12b-1 fees, distribution and service fees
Fee-based Financial Advisors
While fee-based arrangements with a financial advisor sound straight-forward, the costs aren’t always fixed. These professionals charge a flat fee for various financial advising services and take a percentage from managed portfolios. To a lesser degree, these advisors also earn commissions from insurance companies and brokerages. You may pay an annual fee, quarterly fee or monthly retainer for the flat fee portion of services. If you use a flat-fee financial advisor for investment advice while maintaining your portfolio yourself, you avoid paying the fluctuating percentage. However, most fee-based advisors only work with high-wealth individuals who aren’t interested in managing their accounts on their own.
That’s not all there is to fee-based payment structures for financial advisors. Fee-only financial advisors are the only financial professionals who get paid entirely from billing their clients, usually by the hour. Both fee-based and fee-only advisors have a legal fiduciary obligation to clients. However, using a fee-only advisor is the only option you can be sure creates no conflict of interest between the advisor’s earnings and your financial account balances.
| Commission vs. Fee-based Financial Advisors | |||
| Payment Structure | Compensation | Best For | |
|---|---|---|---|
| Fee-Based | Flat fees for service Commissions Percentage of assets |
Complicated finances with portfolio management, High-wealth families | |
| Fee-Only | Flat fees Possibly an hourly rate Package deals for services |
Moderate financial planning Small asset accounts, new to financial advising | |
| Commission-Only | Commissions from financial institutions backing the instruments sold | Less active portfolio, insurance and investments, Moderate to simple planning | |
Which is Best: Fee-based or Commission-based Financial Advisors?
Ultimately, you need to determine which type of financial advisor best meets your needs. For financial advisors who get paid a percentage of assets, compare their expected fees to the projected savings or growth of your asset accounts. Balance the cost of service with the anticipated savings or increase in your asset accounts. Talk to friends and family members to learn about their experience and the financial advisors they like. Set up a meeting with at least three financial advisors to learn how they can help you and how you would pay them. This initial consultation should be free.
A commission-based financial advisor can be a trusted option, but there is the possibility of a conflict of interest. Most commission-based advisors offer impartial advice. For people who do not buy or sell investments frequently, it can make sense to not pay upfront for a financial advisor, especially for larger asset accounts. Most commission-based financial advisors have a keen understanding of how to use insurance to protect and grow assets. These professionals help clients find the proper coverage over multiple policies while considering their future goals and the cost.
If a financial advisor pressures you to make stock or mutual fund transactions that make you uncomfortable, move your business to another firm. The financial advisor is likely trying to earn a commission from frequent trades using a practice called churning. Ask the financial advisor for the reasoning behind buying or selling stocks or mutual funds and be sure you understand and agree it’s an ideal time to make the trade.
Fee-based financial advisors are usually best for those who have amassed substantial wealth. These advisors typically offer a wide range of advising services, portfolio management and financial education so entire families can manage their wealth. Fee-only advisors are often best for those entering the workforce for the first time, families with low to average assets or those who want to buy specific types of financial advising services.
Concluding Thoughts On Commission vs. Fee-Based Financial Advisors
There is not a single fee structure that works for all situations. Finding the best financial advisor for your situation takes time and research. Connecting with three financial advisors and evaluating their overall costs can give you the necessary insight to decide which advisor can maximize your profitability.