With all of our terminology and acronyms in the world of finance, sometimes consumers can feel as if they are being spoken to in a foreign language. Confusion by the terminology can lead to mistakes and regret, especially in the area of advisor compensation.
The two terms that are crucial for consumers to understand are fee-based compensation and commission-based compensation. These two compensation models make a huge difference in the kind of advice a client receives and the kind of relationship they are able to build with their advisor.
Differences Between Fee-Based And Commission-Based Advice
Fee-based advisors charge a flat fee for their services. This fee can be structured in multiple ways, whether it is an hourly rate, a monthly retainer, or a percentage of assets under management (AUM). Sometimes fee-based advisors receive commissions based on the products that they sell, but that is secondary, and not the basis for their compensation structure.
Commission-based advisors charge nothing to their clients and are compensated solely through commissions. These commissions come from accounts that they open and financial products that they sell. These products can be anything from insurance to mutual funds.
The differences between these two compensation structures have huge impacts on the advisor’s independence in setting his compensation structure, how well the advisor and clients’ goals align, the quality of their long-term relationship and the legal standard to which they are held.
A commission-based advisor has no say in what they earn, they just have to accept the commissions offered by financial product companies. The profitability of the client-advisor relationship is dictated by a third party, and neither the advisor nor the client has any influence over the matter.
A fee-based advisor, on the other hand, has complete control over what he chooses to charge. He alone decides what his time and knowledge are worth and who he wants to serve. He has the flexibility to set his fee schedule to correspond with his ideal client’s ability to pay.
Fee-based compensation also allows an advisor to better align his goals with his clients’. A commission-based advisor has to focus on selling products, which may not always be what is best for his clients.
A fee-based advisor has the freedom to be more objective. Because their pay is not dependent on selling specific products, their personal goals don’t conflict with those of their clients. Advisors who charge based on AUM are even more motivated to multiply their clients’ assets because the more money they help their clients make, the more money the advisor makes.
Usually, commissions are paid up front, either immediately or in the first couple of years after the initial sale. Once he has received his commission, the commission-based advisor really has no reason to continue the relationship with the client, unless he anticipates future sales.
In contrast, fee-based advisors are paid recurrently as they serve their clients and they don’t get paid unless they continue to provide their clients with excellent service. Because of this, fee-based advisors are much more likely to take a long-term approach with their clients, only making recommendations that will work over the long-run and building deep relationships.
Suitability vs. Fiduciary Duty
Finally, commission-based and fee-based advisors are held to different legal standards. Fee-based advisors have a fiduciary duty to their clients, meaning that they have to put the client's’ best interest ahead of their own and that of any broker, dealer or other institution.
Commission-based advisors do not have a fiduciary duty to their clients; they only have to follow the suitability rule. They cannot sell their clients products that do not suit their needs and objectives. They do not have to do what is best for their clients, as long as what they provide them with is considered suitable.
At Nobile Hinchey Private Wealth Management, our first priority is your overall financial success. We have the ability to offer fee-based and commission based advice based on the needs of our clients. We want the freedom to help you realize your dreams without any conflicts of interest. If you are looking for a long-term relationship with a fiduciary that will always put you first, call us today at (860) 659-5977 or email [email protected].
About Michael Nobile
Michael Nobile is the CEO of Nobile Hinchey Private Wealth Management, an independent financial services firm serving high-net-worth families and business owners near Glastonbury, Connecticut. Michael brings 35 plus years of experience in the wealth management industry and is extremely knowledgeable in retirement income and tax-advantaged strategies. Outside the office, Michael enjoys time with his wife, two children, and two grandchildren. Longtime Glastonbury residents, they now reside in East Hampton. It’s Michael’s dream to introduce his grandchildren to his business and work together someday.