Fee-Based vs. Fee-Only: How Your Advisor Gets Paid Can Impact Your Retirement

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For decades, you planned ahead and saved. You dutifully contributed to your 401(k) and meticulously researched financial strategies that paid off. Your savvy investments helped you build the financial security you enjoy today. And now that retirement is a reality, you want to make sure your hard-earned nest egg will last. You need a financial advisor who will help you turn your retirement savings into a steady stream of ample income for decades to come.

But what makes one financial advisor better than the next? Is there a specific type to look for? In fact, there are several things to be aware of before hiring a professional. One key consideration is compensation, or the manner in which an advisor gets paid for their services.

In this post, we’ll look at how financial advisors are typically compensated and the impact this can have on how they serve their clients.


Two Types of Fee Structures

In the financial advising profession, there are essentially two types of fee structures:

Fee-based: An advisor’s income is based on both fees and commissions from brokerage firms, insurance companies, and mutual funds.

Fee-only: An advisor’s income is based solely on the services they provide and the amount of assets they manage for clients.

Let’s review the differences between these two compensation structures and show why one type of advising might be better than the other.


Fee-Based Advising: More Than Meets the Eye

A fee-based advisor’s income is a combination of fees paid by you, the client, for accounts under management (AUM) as well as fees from commissions. The fees that you pay are directly linked to your account earnings. By contrast, an advisor’s income from commissions is linked solely to their ability to sell financial products—regardless of whether these products actually improve the performance of your account.

Here are three specific ways a fee-based advisor might earn a commission:

  1. Executing trades – Acting as a broker-dealer, an advisor can earn a commission for completing a buy or sell order for a security.
  2. Selling mutual fund shares – Acting as a broker, an advisor can earn a commission from selling shares of mutual funds.
  3. Selling insurance products – Acting as an insurance agent, an advisor can earn a commission from selling insurance policies.

Because of the potential for a commission, you, as the client, can never be certain that the recommended products are in your best interest, especially if the recommendations happen to be the most profitable for the advisor. This presents a conflict of interest that can be quite costly. For example, a fee-based advisor might pressure you into a short-term buy-and-sell strategy that could threaten your long-term retirement planning, especially in a volatile market. In 2015, a report by the federal government, The Effects of Conflicted Investment Advice on Retirement Savings, calculated the collective annual costs of commission-based conflicts of interests to be a whopping $17 billion.


Fee-Only Advising: The Value of Transparency

Compared to fee-based advising, the fee-only approach is straightforward. An advisor is compensated by fees that are paid directly by you in one of three ways. You might pay the advisor a flat fee, an hourly rate, or a fee calculated as a percentage of AUM.

Because a fee-only advisor isn’t preoccupied with making a commission from selling financial products, they can be laser-focused on your specific financial goals. You’ll receive more of their time and attention. Also, when a fee-only advisor acts as a fiduciary, this means they’re duty-bound to prioritize your interests over everything else. In fact, the fiduciary standard is the highest standard of care.

To sum up, the main benefits of hiring a fee-only advisor are:

  • Total transparency – You know how the advisor is being compensated.
  • No conflicts of interest – The advisor doesn’t have to divide their allegiances between your investment and their potential for a commission.
  • A higher level of care – Because the advisor isn’t conflicted, you receive their full attention and expertise, especially if they serve as your fiduciary.


Looking for the right fee-only advisor?

At Level Financial, our financial advisors are fee-only retirement planning experts with a fiduciary responsibility to do what’s best for you. We don’t work on commission, so you can be confident that our advice will be completely focused on your needs and goals. Talk to one of our trusted advisors to see if we can help. Feel free to reach out to us with any questions you might have. We want to hear about your retirement goals and concerns. Click here to set up a free consultation or call 716-634-6113.


About Level Financial Advisors

Since 1979, Level has helped countless individuals and families in the greater Buffalo area retire with dignity, achieve their financial goals, manage their wealth, minimize taxes, and leave behind a legacy. And unlike other so-called financial “advisors,” our CERTIFIED FINANCIAL PLANNER professionals are fiduciaries in the truest sense. We aren’t compensated for the products we sell, and we don’t work on commission, so you can be confident our advice is in service of your goals—not our own bottom line.


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