Fee-Based vs. Commission-Based — Which Financial Advisor Do You Choose?
Posted by Ocean Wealth
When it comes to financial planning — you’ve got choices. The type of financial advisor you choose to hire will depend on your wealth management needs. Some people look for simple financial planning solutions, while others are more complex. Wherever you land on the spectrum, having a financial advisor help to guide you is always a valuable venture.
Of course, every financial advisor must be paid for their services. All investors need to consider this because it can impact how much you pay in a given year for the services you receive. You need to find a financial advisor whose payment model fits with your personal needs. In the world of wealth management, there are generally two types of financial advisors to look at.
We’re talking about fee-based and commission-based financial advisors. As a client, you need to assess your needs and choose accordingly. Trust us, it can be a tough decision. That’s why we’re to help out. We’re going to take a look at some of the pros and cons of each advisor type to help shed light on the best choice for your needs.
Commission-Based Financial Advisors
The concept behind a commission-based financial advisor is pretty simple. Much like a car salesman, they only get paid via (you guessed it) commission. This essentially means they’re compensated by commissions on financial transactions or products. In short, the more they do — the more they get paid.
Most commission-based financial advisors work for major firms. This can be a bit misleading, though. Clients may think that an advisor at a major firm has stellar resources, but they're more like independent contractors. While their firm provides some operational support, advisors receive little to no base salary from their employer.
Another critical thing to keep in mind is that commission-based advisors don’t have to be fiduciaries. What does that mean? It means that advisors can sell products claiming it's the best thing for your portfolio — even if it's not. They don’t have a legal obligation to their client in this sense. This means they don’t have to disclose any conflicts of interest, and their primary duty is to their employer.
Fee-Based Financial Advisors
A fee-based financial advisor usually gets paid two ways: a retainer fee or an hourly rate. If you’re trying to manage a large portfolio, a fee-based advisor makes more sense to have. They’re not a one-off solution and are always there to assess your portfolio. It’s the difference between an occasional good date versus a steady long-term relationship.
Unlike a commission-based advisor, fee-based advisors have a fiduciary duty to their client. This is great from a client perspective because they’re legally obligated to put your best financial interests first. A fee-based advisor can't sell you an investment product that goes against your needs.
While fee-based advisors generally charge more, you’re buying their time and devotion to your portfolio. A 1-2% annual charge for managing assets is quite common, so you have to make sure there's a need for you to employ this type of advisor.
Here at Ocean Wealth, our fee-based model is priced competitively and puts our clients first. We charge one annual fee that's based on the value of your portfolio with no hidden charges. Contact us today to learn more about how we can help you navigate all your wealth management needs.