Confused? That’s understandable. The compensation paid to financial advisors can be murky. Some financial advisors don’t want clients to know how much they make from managing investments. So, let’s clarify how financial advisors are compensated, the difference between “fee only” and “fee based”.
Fee based advisors typically work for a brokerage firm or insurance company and can receive fees paid by you, and commissions paid to them by their firm or insurance company. Fee based advisors are not required to disclose the amounts of their commissions to their clients, nor are they required to disclose conflicts of interest that may influence a client’s ultimate decisions. The term fee based is misleading in that not only does an advisor receive fees under a fee based compensation system, but they can also accept commissions from financial products recommended or sold.
Fee only financial advisors do not receive any compensation from brokerage firms or insurance companies. The only source of compensation a fee only financial advisor receives is from fees paid directly to them by their clients. A fee only financial advisor may calculate their fees hourly, as a percentage of the assets they manage, or a flat fee. A fee only advisor will always tell clients exactly what they are charging and how their fees are calculated. Fee only advisors are held to a fiduciary standard, which is the highest standard of care and it is their responsibility to serve their clients to the best of their ability. This means they are required to put their clients’ interests ahead of their own and to openly disclose any conflicts of interest they may have when making investment recommendations to their clients.