Commission, Fee-only, or Fee-based: How Do Financial Advisors Get Paid?

If you’re thinking about hiring a financial advisor, it is important to ask a few questions – one being “How is s/he compensated?”

Depending on the financial advisor’s practice (independent firm, bank, or investment organization), their services could either be commission-based or fee-only. To understand the difference, Jennifer Black – President and Certified Financial Planner at Dedicated Financial Solutions – advises that you first familiarize yourself with these terms:

Fiduciary duty: the advisor is required, by law, to provide services according to the client’s best interests.

Conflict of interest: when an advisor or firm is involved in multiple interests that may not benefit the client

Duty to disclose: the lawful practice of providing information about the advisor’s methods and services

Commission-based

Typically, financial advisors who work for large investment companies are paid by commission. This means they get a certain percentage of the client’s investment based on the following:

  • Front-end load: an upfront fee is deducted from the client’s money before the rest is invested
  • Back-end load: the mutual fund company pays the advisor for selling its product to the client, who does not get charged directly. However, the client may have to pay a fee or percentage if they withdraw their money within a short time frame
  • A commission is charged for every stock purchase or sale

Fee-only

Advisors who provide fee-only financial services usually have no conflicts of interests, and do not receive commissions based on the products they recommend. These individuals provide comprehensive advice and planning.

Depending on the type of service, clients may expect to be charged a one-time fee. Some advisors might also charge hourly or rates based on the time taken for creating the plan and meeting with the client

Fee-based

This advisor usually sells products but would not receive a commission for selling the products. The fee would be calculated as a percentage of overall assets invested with the advisor. Therefore, there is no bias with the types of assets being managed. With this arrangement, the advisor is typically providing additional planning as well as investment management.

In all scenarios above, the advisor may be monitored by certain organizations of discipline; these parties enforce strict rules on professional and ethical conduct (i.e. Financial Planning Standards Council).

 

To learn more about Dedicated Financial Solutions fees and services, please contact us.

Sources: Yahoo Finance, Canadian Living, and Forbes.

 

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