Understanding Fee-Only Financial Advisors vs Commission-Based Financial Professionals

Summary: Webster defines a fee as a sum paid or charged for a service. For example, in the financial services industy, that service could be developing a financial plan, reviewing your investment portfolio, or perhaps a fee to manage that investment portfolio

Fee-Only vs Commission-Based

Fee

Charging a fee instead of 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.

Advisor or Financial Professional

Many financial professionals in the financial services industry are not fiduciaries. Instead, the 1934 Securities Exchange Act regulates them. In addition, they get paid a commission for selling financial products; the advice is incidental to the product sale. Therefore, an ongoing advice relationship between the client and the advisor is not expected.

Regulation Best Interest, a new rule from the Securities and Exchange Commission (SEC), requires that advisors working under the 34 Act no longer call themselves financial advisors; instead, they must identify themselves as financial professionals.

Financial Advisor or Financial Professional

Investment adviser representatives 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 of the two laws depending on the client. So I do not have to turn clients away. However, it could add a layer of confusion for a client.

What Costs More?

Because the advice is ongoing, asset fee advice will most likely cost more than the commission (hourly rate fee advice may be the exception). So when a customer contemplates hiring an advisor, one of the first questions is whether they need continuing advice.

Another is whether the initial advice is better if provided under a fiduciary standard. However, one thing to remember is that Regulation Best Interest now requires that broker-dealers minimize conflicts of interest for their financial professionals.

Financial Advisor Cost

The hourly rate differs among financial advisors. The fee hovers around 1% but has been trending down because of robo-advisors and other internet-type advice.

Remember that the asset fee is ongoing and sometimes covers any additional advice you require. In contrast, the hourly rate works more like how attorneys are paid. The advisor gets paid when advice or services are rendered.

Additional Costs

Whether you pay a commission or fee, the products recommended will have additional costs. For example, a fund most likely will have a management fee. Moreover, some products have fees if you surrender them before a certain period.

The commission is synonymous with actively managed funds. Simultaneously, fee advisors tend to recommend index funds partly because they are cheaper, helping offset their fees.

Fee-Only Financial Advisor

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.

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.

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