Financial Advisor Fees
Commission Based Advisors VS. Fee Based Advisors
What are the main differences between financial advisors? What type of advisor is right for my family? Is my current advisor charging me too much for his services? Is my current advisor charging me a commission or is he/she charging me a fee? Or both?
In the good old days just about every advisor was a commission based advisor. However, now there are different business models that financial advisors have adopted. Let’s look at some of the differences.
A commission based advisor sells products such as investments or insurance and he/she makes a commission from the sale. Commission based advisors receive their compensation from the insurance or investment company.
Ways to determine if you have a commission based advisor?
- Advisor talks about sales charges
- Advisor only sells one mutual fund family
- Advisor is a product pusher – for instance, advisor is very adamant on you purchasing one particular product such as an annuity or life insurance
- Who does your advisor work for? If your advisor works for a brand name insurance company then he/she is probably compensated via commissions.
As a comparison, a fee based advisor collects fees for managing your investments or giving you financial advice.
Ways to determine if you have a fee based advisor?
- The advisor charges an hourly rate for service
- The advisor charges you X% for managing your entire investment portfolio
- The advisor regularly meets with you
The easiest way to tell the two apart is to ask your advisor, “WHO PAYS YOU?” If the answer is “the insurance or investment company” then you have a commission based advisor. If the answer is “the client does” then you are working with a fee based advisor.
WHAT TYPE OF ADVISOR IS BEST?
Fee based advisors get compensated the same whether they recommend that you buy XYZ Mutual Fund or ABC Mutual fund. This typically leads fee based advisors to work in the client’s best interest. One very cool thing to note is that most commission based advisors work based on the Suitability Standard which says that they have to recommend to the client a product that is suitable.
*Most products available are suitable for you (ie: you need life insurance, you need a retirement savings vehicle so recommending a product that fills those needs would be suitable) though it may not be in your best interest to buy that particular product. Most fee based advisors are held to the Fiduciary Standard which says they have to act in the client’s best interest at all times.
Lastly, commission based advisors tend to be more transactional. They make the majority of their compensation on the initial sale with little incentive to see you after that except to cross-sell you another product. Fee based advisors, including the majority of Certified Financial Planners, are relationship driven. A fee based advisor’s compensation is spread out throughout the course of the advisor/client relationship; they want to keep you informed and happy. And they want to work with you for many years.