Fee-Only, Fee-Based, and Commission-Based Financial Advisors – What’s the Difference?

Many investors looking for help with their financial planning and wealth management strategy have heard that an advisor’s fee structure matters. 

This is true; it’s important to know how the advisor makes their money, especially for those who want to work with an advisor who is also a fiduciary (someone who is legally required to work in the client’s interest). This is why fee-only advisors – advisors that never make commission – are often preferred; Fee-Only advisors are fiduciaries at all times, and are only paid by their clients under a transparent fee structure.

But often, consumers looking for a fee-only advisor happen upon a fee-based advisor, thinking they are one-in-the-same. They ARE NOT one-in-the-same. Now throw commission-based advisors into the mix, and searching for a financial advisor becomes an extremely confusing endeavor for consumers. In this article, I explain the differences between fee-only, fee-based, and commission-based financial advisors, and what consumers need to know before deciding which one is right for them.

Defining Fee Structures

In general, there are three types of fee structures that an advisor can build their business on:

1. Fee-only 
2. Fee-based
3. Commission

What is a fee-only financial advisor?

A fee-only financial advisor charges a fee to manage your financial portfolio. This fee could be a percentage of the assets under management (AUM), a flat fee regardless of AUM, retainer, or hourly/project based.  A fee-only advisor receives no compensation from anyone other than their clients. Many regard this as an ideal structure – since fee-only financial advisors are only incentivized by the fee paid to them by their clients, they have no reason to invest their clients in financial products that may not align with the client’s portfolio strategy.

What is a fee-based financial advisor?

A fee-based advisor is compensated by their client and can receive compensation from commissions from the sale of financial products like insurance, annuities, and mutual funds. Typically, the advisor sells the financial product to their client. This can create a conflict of interest – if the advisor has an incentive to invest you in a mutual fund or sell you an insurance policy, how do you know if they are working in your best interest?

What is a commission based advisor?

Advisors who are compensated by commission make their money based on the products they sell to their clients. Of course, advisors who are only compensated by commissions rarely explain that. Instead, they may portray themselves as a financial advisor who doesn’t have any service fees paid by clients. 

Differences in Compensation Structure

The truth is that most consumers can spot a commission-only advisor. They’ve heard that it’s important to work with an advisor who is compensated by their clients, but they may or may not be able to distinguish between fee-only and fee-based advisors. 

	How does advisor make money?	Fiduciary at all times?	Conflicts of Interest?
Fee-Only	Paid only by the client	Yes	Minimized and disclosed
Fee-Based	Paid by the client + commission from selling products like insurance and annuities	No	Yes
Commission	Majority from selling insurance and investment products	No	Yes

It makes sense that consumers would find this confusing. The terminology used by advisors when it comes to fees can feel vague, and fee-based advisors may even try to benefit from the fact that consumers are actively looking for fee-only advisors. 

How to tell if an advisor is fee-only, fee-based, or commission-based

Luckily, consumers aren’t stuck guessing at whether or not an advisor is fee-only. There are a few ways to tell quickly and easily whether an advisor is a fee-only investor or not. 

1. Check their Form ADV. By checking an advisor’s Form ADV, consumers can see how they’re compensated, the amount of assets their firm manages, other business activities they participate in, and whether or not there has been disciplinary action taken against the firm. 
2. Research. Do a little bit of digging! Most fee-only or fee-based advisors will loosely outline their fee structure on their website, and you may be able to ask for collateral that reviews fee schedules.
3. Ask. When in doubt – ask. If an advisor can’t give a clear answer about how they’re compensated, or offers explanations for the products they sell, they’re likely not fee-only. 

How does receiving commission impact investment advice?

It’s important that every consumer understands how their financial advisor is compensated. When an advisor receives commissions from product sales, they’re motivated to sell those specific products – even if they’re not in their clients’ best interest. 

Even if an advisor is fee-based and genuinely feels that they put their clients first, the conflict of interest that commission sales presents is still problematic. Commissions can motivate an advisor to advise a client against some financial decisions that would bring them peace of mind, such as diversifying their portfolio, or paying down debt, in favor of only selecting products they receive a commission from. 

Understanding fee structures that financial advisors use, and how to determine whether an advisor is compensated for the sale of financial products to their clients, can help consumers make empowered decisions about hiring an advisor who has their best interests in mind. At the end of the day, fee-only advisors are the only financial advisors who can confidently say they advise clients without any conflicts of interest.