Financial advisors charge in many different ways. Today, I wanted to highlight one of the most significant differences between how advisors charge- commission vs. fee-only- as it plays a significant role in determining how the relationship is defined.
To oversimplify, if an advisor’s compensation is based on commission, they receive compensation from selling a financial product to you. For a fee-only advisor, they are not allowed to receive commissions from the sale of a product to you. They are paid typically by a percentage of invested assets or a fixed fee that is paid monthly or quarterly.
There are conflicts of interest regardless of the advisor’s compensation structure. Being aware as to the compensation structure and how much you are paying can alert you to a few of those conflicts of interest. In my opinion, if you have an ongoing relationship with a financial advisor, a fee-only relationship presents fewer conflicts of interest. A fee-only advisor will be paid as long as the client believes they are receiving good service and maintains the relationship. A commission-only advisor will continue to be paid if they continue to sell the client product.
I am not here to say commissions are always bad. There are plenty of industries where commissions are used. I am not even here to say they are always bad for financial advisors. In my opinion, the conflicts of interest are greater, though. Therefore, consumers need to be very aware of what and how they are paying.