Fee-Only vs. Commission: Understanding the Real Cost of Financial Advice
The Core Question: Fiduciary Standard vs Commission — What Costs More?
Charging a fee rather than a commission has become synonymous with fiduciary advice provided under the 1940 Investment Advisers Act. The expectation is that the advice is ongoing, which, if so, requires the advisor to be a fiduciary.
Because the advice is ongoing, asset fee advice will most likely cost more than the commission (annuities in retirement plans might be the only exception). So when a customer contemplates hiring a professional, one of the first questions is whether they need ongoing advice.
Another consideration is whether the initial advice is better delivered under a fiduciary standard. However, one thing to remember is that Regulation Best Interest now requires broker-dealers to minimize conflicts of interest for their financial professionals.
Breaking Down Fee-Based Advisors: Asset Fee vs. Hourly Rate
The asset fee generally hovers around 1%. This fee covers the ongoing management of your investment portfolio, so it is continuous. This structure often covers any additional advice you may require, as the advisor already manages the day-to-day oversight of your assets.
In contrast, the hourly rate works more like how attorneys are paid. The advisor gets paid when advice or services are rendered. You are paying for a specific task at a specific time, but it does not include the continuous management of your investment portfolio.
Fee-Only Advisors: A Specialized Approach
Unlike a dual-registered advisor, a fee-only financial advisor works exclusively under the Investment Advisers Act of 1940. Their only compensation is the fee paid, whether hourly or a percentage of assets.
Fiduciary Advisor vs Commission-Based Financial Professional: The Title Tells the Story
Many financial professionals in the financial services industry are not fiduciaries. Instead, they are regulated under the 1934 Securities Exchange Act. In addition, they are paid a commission for selling financial products; the advice is incidental to the sale. Therefore, an ongoing advisory relationship between the client and the advisor is not expected.
The Regulatory Divide: Advisor Titles & The 1934 Act
Under Regulation Best Interest, broker-dealers operating under the 34 Act are expected to use the title ‘financial professional’ rather than ‘financial advisor’ — a title that implies a fiduciary relationship they are not required to uphold.
Financial Advice for Public Employees
Most financial advice for educators in public schools is provided by financial professionals working under the 34 Act who are paid a commission for selling 403b annuities or 403b7 mutual funds.
The one exception is possibly 457 plans with institutional pricing and an investment advice offering for a fee.
The Dual-Registered Advantage: Flexibility Without Compromise
While financial professionals fall under the 1934 Act, a second, stricter path exists: the 1940 Investment Advisers Act. Those who operate under this law are called Investment Adviser Representatives and must act as fiduciaries.
Investment adviser representatives (fiduciaries) can continue to call themselves financial advisors, and advisors such as myself, who are registered under the 1934 Securities Exchange Act and the 1940 Investment Advisers Act, can also do so.
I am dually registered, which is both good and bad. I can work under either Act, depending on the client, so I do not have to turn clients away. However, it could add confusion for a client.
Tim Hayes has been our financial advisor for many years and we have found our dealings and communications with him to be both helpful and informative. Tim is personable, attentive, knowledgeable, articulate, and proactive. It has been our honor to entrust our retirement investments to him and we highly recommend him for his financial services.
Roger and Kathleen Tuveson
Clients
Testimonial Disclosure: Testimonials are based on individual client experiences and may not represent the experiences of all clients. They are not a guarantee of future performance. Each client’s situation is unique. No compensation has been provided for these testimonials.
The Hidden Layer: Product Costs Beyond Advisor Compensation
Whether you pay a commission or a fee, the recommended products will have additional costs. For example, a mutual fund will most likely have a management fee. Moreover, some products charge fees if you surrender them before a certain period.
The commission model is synonymous with actively managed mutual funds. Simultaneously, fee-based advisors tend to recommend index funds partly because they are cheaper, helping offset their fees.
Independent 403(b) Advisor for Your District
As an independent financial advisor offering flexible payment options, including fee-only, hourly rate, or commission, I can work with many companies in your school system’s 403(b) plan. (Partial list of companies I work with includes Fidelity and Aspire- fee-only; American Funds, Putnam, MFS, Security Benefit, and Invesco – commission).
These are the opinions of Financial Advisor Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only and should not be construed or acted upon as individualized investment advice. Content provided via links to third-party sites should not be considered an endorsement of content that we cannot verify completeness or accuracy of.