Choosing between a commission-based or fee-based financial advisor is a complicated decision. Various personal finance authors say to avoid commission-based advisors, while others advise against 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. Commission-based financial advisors get paid by the companies providing the products the advisor sells to manage your assets, such as banks, brokerages and other financial institutions. If you work with a commission-based advisor, they must disclose commissions or bonuses in a Best Interest Contract Exemption (BICE).
Typical sources of 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
If your advisor doesn’t work on commissions, they likely get paid from fees they charge to manage your account. These advisors can operate a fee-based or fee-only business model—they sound similar, but there’s a difference in how they get paid.
Fee-Based Advisors
Fee-based advisors make most of their money from fees, though some may also earn commissions. 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 a flat retainer, an hourly rate, or a percentage of your assets managed. Most fee-based advisors only work with high-wealth individuals who don’t want to manage their accounts themselves.
These advisors aren’t bound by the fiduciary standard that fee-only advisors are, but rather a suitability standard defined by the SEC that requires them only to recommend investments that are “suitable” for your economic situation.
Fee-Only Advisors
A fee-only advisor earns money only through advisory fees, not commissions. Most of these advisors get paid only by billing their clients annually, quarterly, or hourly. Many finance and investment experts recommend you work with fee-only advisors because they are bound by the fiduciary standard—in other words, they’re obligated to put their clients’ interests first. Most registered investment advisors (RIAs) and certified financial planners (CFPs) are fiduciaries.
| Commission vs. Fee-Based Financial Advisors | |||
| Payment Structure | Compensation | Best For | |
|---|---|---|---|
| Fee-Based | Flat fees for service Commissions Percentage of assets |
Complex 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 | |
The Fiduciary Duty
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. As a client, your advisor can’t sell you an investment product that goes against your risk tolerance, needs, or long-term goals.
Always ask finance professionals how they get paid and whether they’ve signed a fiduciary oath before committing to work with them.
Which Is Best: Fee-Based or Commission-Based Financial Advisors?
Ultimately, you need to determine which type of financial advisor best meets your needs. To decide, consider the total assets in your portfolio. You could pay more fees using an advisor who charges based on a percentage of assets. Balance the service cost with your accounts’ anticipated savings or increase. You can also source recommendations from family and friends—just make sure to chat with at least three professionals first. Initial consultations are usually free.
A commission-based financial advisor can be a valuable resource if you don’t plan to buy or sell investments frequently. You’ll only pay them when they make a transaction on your behalf. For example, these advisors can help you find the proper coverage over multiple policies depending on your goals and budget.
That said, your commission-based advisor might not be a fiduciary. If a financial advisor pressures you to take action on something that makes you uncomfortable, move your business to another firm. Always ask your financial advisor to explain why they recommend buying or selling stocks or mutual funds before agreeing to make the trade.
A fee-based financial advisor is usually best for those who have amassed substantial wealth. These advisors typically offer a wide range of advising services, such as portfolio management and financial education, so they’re often more expensive. You could also benefit from a fee-only advisor if you’re new to investing, have fewer assets, and want impartial advice on how to grow your wealth.
Bottom Line
There is no single fee structure that works for all situations. Finding the best financial advisor for your situation takes time and research. Connect with three financial advisors and evaluate their overall costs to determine which advisor can maximize your profitability while keeping your best interests in mind.
