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Fee-only Vs. Fee-based Advisors

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The Importance of Knowing How Your Advisor Gets Paid

Brokers and financial advisors make money in a number of ways, including:

  • Salary and commissions paid by their firms
  • Hourly or flat-rate fees for their services
  • Third party commissions
  • Or a combination of these sources

Unfortunately, some financial professionals may try to pressure investors into new investments that generate a commission for them even when those investments aren’t in the best interest of the client. 

Fee-Only Advisors

Fee-only advisors are paid a set rate for the services they provide, rather than getting paid by commissions on the products they sell or trade. Fee-only advisors may be compensated in a variety of ways, including:

  • Flat retainers
  • Hourly rates
  • Specific charges  for the task at hand

Fee-only advisors may have fewer inherent conflicts of interest and sometimes provide more comprehensive services for their clients, including financial planning or trust and estate services. Conversely, fee-only advisors may be more expensive or provide fewer products and services.

Fee-Based Advisors 

Fee-based advisors are typically paid based on a percentage of the assets that they manage for their clients. As such, fee-based advisors are typically actively managing their client’s portfolios and making frequent changes to the account holdings. Advisory fees may vary based on the amount of money you have invested with the advisor. Fees are typically paid monthly or quarterly and can be as high as 2.0% or more on an annualized basis. 

A fee-only account may not be the right option for everyone. If you do not want an actively-managed account, are uncomfortable giving discretion to an advisor, or you prefer a buy-and-hold strategy, then ,paying your advisor a percentage of your assets under management is likely not the best option for you. 

The Takeaway

The takeaway is that it’s important to know how your advisor is getting paid in order to ensure that the fee structure is the best fit for you. You can keep yourself informed by asking your advisor directly about fees and commissions, carefully reading through your brokerage agreement, and reviewing your account statements and other documents to monitor fees and commissions.

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