Fee-Based vs. Commission-Based Advisors

How do financial advisors get paid?

Advisors can be paid in a few different ways, and all of them are common and legitimate. The three main models are commission-based, fee-only, and fee-based. Knowing which one an advisor uses helps you understand their advice and choose the model that fits you best.

Why it helps to know

Advisors are professionals, and they are paid for their work. Different payment methods fit different service models. This is where fiduciary duty matters: a fiduciary advisor must put your interests first even when they are paid, and must clearly explain any payment method that creates a possible conflict.

Commission-based advisors

A commission-based advisor earns money when you buy or hold certain products, such as a mutual fund, an annuity, or an insurance policy. The commission can come at the time of purchase, and some products also pay the advisor a smaller ongoing amount each year for as long as you hold them.

One thing to note: a commission is tied to the product, not to how well your investments perform. With this model you may pay little or nothing out of pocket up front, so it helps to ask which products the advisor offers and how each one pays them.

Fee-only advisors

A fee-only advisor is paid only by you, the client. They do not earn commissions from selling products. They may charge in a few ways:

• A flat fee for a plan.
• An hourly rate.
• A yearly fee based on the amount of money they manage for you — often around 1% of that amount each year, but it varies.

It is worth being clear about that last one: the yearly fee is a percentage of the money being managed, not a percentage of your returns. You pay it whether your investments rise or fall. Many fee-only advisors are also fiduciaries.

Fee-based advisors

"Fee-based" sounds a lot like "fee-only," but the two are different — a common point of confusion. A fee-based advisor charges you a fee and can also earn commissions from products they sell, so they have two ways to get paid.

Many fee-based advisors do excellent work. Because they earn in two ways, it is helpful to ask how they will be paid in your specific case.

What about a percentage of your returns?

Some people assume advisors take a cut of the money your investments earn. This is called a performance fee, and it is actually uncommon for everyday advice. It is also limited by law: in most cases an advisor can only charge a performance fee to clients with a high level of assets or net worth. The percentage you are far more likely to see is the yearly fee on assets managed, described above.

A simple way to remember it

• Commission-based: paid by selling you products.
• Fee-only: paid only by you. No commissions.
• Fee-based: paid by you and can earn commissions too.

Helpful questions to ask

Asking how someone is paid is a normal, expected part of the process. You might ask: "How exactly are you paid?", "Do you earn commissions on anything you might suggest to me?", "Are you a fiduciary?", and "Can you show me your fees in writing?" See more in questions to ask a financial advisor.

How our service helps

These payment models can take a moment to sort out, and that is completely understandable. Our free service matches you with vetted fiduciary advisors, so you can start the conversation with confidence and with no obligation to move forward. For typical dollar figures, see how much a financial advisor costs.