Fee-Based, Fee-Only and Commission-Based: What’s the Difference?
Financial advisors can be compensated in a variety of ways, typically falling into one of three categories: commission-based advisors, fee-based advisors, or fee-only advisors. Each approach to compensation has its pros and cons, but no matter what type of advisor you choose, it’s important to understand the different types of financial planning fees you may be charged, so that you can be sure you are working with the most appropriate advisor for your situation.
Commission-based advisors: Some financial advisors are paid through commissions. This means that they earn money when a client purchases or sell securities. The commissions charged in this situation can vary widely, from discount brokerages that offer low commissions but limited advice to full-service brokerage with more personalized service, but higher commissions. In addition, because advisors who are paid solely through commissions don’t make much money if a client doesn’t conduct many transactions, some unethical brokers may encourage clients to conduct unnecessary trades.
Fee-only advisors: Fee-only planners are paid solely by the client. In a fee-only financial planning situation, the planner receives no commissions, since the fee-only advisor does not sell products. Instead, the client pays for planning services either by the hour or by the plan. Fee-only financial planners also manage assets, charging a fee based on the percentage of assets under management (AUM).
Fee-based advisors: Like a fee-only financial planner, a fee-based planner may charge a fee based on AUM. Fee-based advisors may also charge hourly planning or by-the-plan fees. In certain situations, fee-based advisors may also receive commissions on product sales.
The right type of financial planner for you depends on a variety of factors. Before choosing an advisor, you should conduct a thorough assessment of the advisor’s business model and make sure you have a clear understanding how a financial planner’s fee is calculated and what your costs will be.
Why Choose a Fee-Based Advisor?
For many clients, a fee-based advisor may be a good choice. By combining aspects of a fee-only financial advisor with those a commission-based advisor, clients get the best of both worlds. The most important thing is to avoid a firm with conflicts of interest. Since Yerba Buena Financial Partners has no allegiance to any product or company and we can research the best option for your situation without conflict or bias.
Yerba Buena Financial Partners is a fee-based wealth management firm. Our fees reflect factors such as a plan’s overall complexity, the investigative and research resources required for a plan’s creation, and the expertise needed for a plan’s ultimate implementation, supervision and monitoring. We are committed to transparency, and it is our policy to fully disclose all fees and expenses to our clients.
