Fee-only, fee-based and commission advisors

Three ways financial advisors are paid: only by clients, by a mix of client fees and product commissions, or mainly by commissions on products sold.

What it means

A fee-only advisor is paid only by clients, through a percentage of assets, a flat fee, an hourly rate or a retainer, and earns nothing from selling products. A commission-based advisor is paid by the companies whose products they sell, such as insurance, annuities or mutual funds with sales charges. A fee-based advisor, despite the similar name, combines both: they charge client fees and can also earn commissions.

The pay model shapes potential conflicts of interest. Commissions can reward selling products that pay more, while percentage-of-assets fees can reward keeping money under management. Registered investment advisers owe clients a fiduciary duty, while brokers are held to a best-interest standard when recommending products, and many professionals wear both hats. Disclosure documents filed with regulators describe how an advisor is paid.

Example

For example, a client investing $100,000 might pay a commission-based advisor a one-time 5% sales charge, or $5,000, on a fund, while a fee-only advisor charging 1% a year would collect $1,000 in the first year. Which costs more depends on how long the money stays invested and what services each provides.

How it’s used

Choosing a financial advisor
Understanding potential conflicts of interest
Comparing the total cost of advice

Strengths and weaknesses

Strengths

Fee-only pay removes product-sales incentives
Commission models can cost less for a single, simple purchase
Fee-based advisors can offer both planning and products

Weaknesses

Commissions can create pressure toward higher-paying products
The term fee-based is easily confused with fee-only
Ongoing fees can cost more over time than a one-time commission

Good to know

Ask any advisor, in writing, how they are paid and whether they act as a fiduciary at all times.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.