The way an advisor gets paid can create a potential conflict of interest, whereby they place their financial interests above your own. Financial advisors are compensated for their advice in one of three ways: commission- based, fee- based, and fee- only. Understanding an advisor’s form of compensation can provide a transparent view of their business practices, and help you decide which advisor is more likely to put your interests first in providing recommendations that benefit your situation.
Both Commissioned and Fee-Based financial advisors can receive compensation based on specific products they recommend to a client. The Fee-Based term was developed by the brokerage and insurance community to counteract success of the Fee-Only classification and, while the terminology sounds similar, they can be confusing and potentially misleading.
What is a Fee-Based advisor?
A Fee-Based compensation model creates the potential for a conflict of interest, which can influence a Fee-Based advisor to recommend a commissioned- based product instead of comparable alternatives that may be less costly to the client. Because of the conflict of interest inherent in these transactions, these advisors may have difficulty putting their client’s interests above their own.
What is a Fee-Only advisor?
The only source of compensation that a Fee-Only advisor receives is from fees paid directly to the advisor from clients in the form of an hourly fee, a retainer fee, or a fee based on a percentage of the assets under investment management. Regardless of the methodology used for calculating fees, the Fee-Only advisor is not receiving a sales commission, and their compensation is independent of the financial products recommended.
Why It Matters
The Fee-Only method of compensation is the most transparent and objective method available because it minimizes conflicts and ensures that your financial advisor is acting as a fiduciary. Fee-Only financial advisors are compensated directly by their clients for advice, financial plan implementation and the ongoing management of assets. Fee-Only financial advisors may be paid hourly, as a retainer, as a percentage of assets under management, or as a flat fee, depending upon the option you choose.
Before you decide to work with a financial advisor, whether it is a small firm, or a big brand name financial firm ask how and what their compensation plan looks like, and whether or not they accept commissions. Do not be afraid of asking tough questions at the end of the day you want to pick the advisor that will put your interest over their own, and provide honest and trustworthy guidance on your financial situation.