The difference is who pays the advisor. A fee-only advisor is paid only by you. A fee-based advisor charges you fees and can also earn commissions on products. A commission-based advisor is paid mainly when you buy something. The names sound alike, which is why so many people mix them up.
The three side by side
| Fee-only | Fee-based | Commission-based | |
|---|---|---|---|
| Who pays the advisor | Only you | You, and product companies | Mostly product companies |
| How you pay | A fee you see: percentage of assets, flat, hourly or per plan | A fee plus commissions | Built into the products you buy |
| Can earn more by recommending a product | No | Yes | Yes |
| Typical registration | Investment adviser only | Adviser and broker (dual registered) | Broker or insurance agent |
| Duty to you | Fiduciary at all times | Fiduciary when advising, sales standard when selling | Best-interest sales standard (brokers) |
Fee-only
You pay the advisor directly, and that’s all they earn. They can charge a percentage of assets, a flat fee, an hourly rate, a subscription or a price per plan. Among fee-only firms that publish prices, the median is $4,500 a year for ongoing planning, $2,000 for a one-time plan, $300 an hour, or 1% of assets.
What you get: the fewest conflicts. The advisor earns the same whichever fund, insurance policy or annuity you choose.
What to watch: a percentage-of-assets fee still gives an advisor a reason to prefer you keep money invested with them rather than, say, paying off a mortgage. Ask how they handle that.
Fee-based
The advisor charges a fee and can also earn commissions, usually from insurance, annuities or some investment products sold through a broker-dealer. Many fee-based advisors are dual registered, which means they’re both an investment adviser representative and a broker.
What you get: one person for advice and products, including insurance.
What to watch: when they recommend a product that pays a commission, they earn more than if you bought a similar product elsewhere. They’re required to disclose it, but the disclosure can be easy to miss. Read their Form CRS.
Commission-based
The advisor is paid by the companies whose products you buy: a sales charge on a mutual fund, a commission on an annuity or a life insurance policy. You don’t get a bill, so it can feel free.
What you get: no upfront cost, which can suit a single, simple purchase.
What to watch: the cost sits inside the product. Front-end loads, surrender charges, ongoing 12b-1 fees and higher fund expenses can cost more over time than paying for advice directly.
Where “fiduciary” fits
Fiduciary describes a legal duty, not a way of being paid. Registered investment advisers owe a fiduciary duty to clients. Brokers follow a best-interest standard when they recommend a product, which is a sales standard, not a fiduciary one. A dual-registered advisor can switch between the two depending on the account.
So “I’m a fiduciary” doesn’t answer the question. Ask instead: “Is there any way you or your firm earn money other than what I pay you directly?” A fee-only advisor can answer no.
Questions that show how an advisor is paid
Ask these in the first meeting. The answers matter more than the label.
- “Is there any way you or your firm earn money other than what I pay you directly?”
- “Are you registered as a broker as well as an adviser?”
- “Do you sell insurance or annuities, or does a company you’re connected to?”
- “Would you earn more if I chose one product over another?”
- “What will I pay in total each year, in dollars, including product costs?”
A fee-only advisor answers no to the first four and gives you a number for the fifth.
How to check which one an advisor is
Look the firm up on the SEC’s adviser search and read its Form CRS and Form ADV. Our guide to telling whether an advisor is really fee-only shows the four checks Wellspent runs.
Which should you choose?
If you want advice without a sales conflict, choose fee-only. If you mainly need a single insurance product and know what you want, a commission-based agent can be a reasonable way to buy it, with a fee-only planner checking the recommendation first.
Every advisor in the Wellspent public graph is fee-only by the checks above. Browse by situation, or start with how much a financial advisor costs.