How Financial Advisors Get Paid: Commissions vs Fee-Based Accounts Explained

Many people are hesitant to meet with a financial advisor because they worry about the costs involved. Before working with a financial advisor, it is important to understand how they are compensated, including any commissions, advisory fees, or other costs associated with your account. While some financial advisors charge an hourly rate or flat fee, the two most common compensation structures are commission-based accounts and fee-based advisory accounts.

In a commission-based account, compensation is generally earned when certain transactions or investment products are purchased or sold. In a fee-based account, investors typically pay an ongoing advisory fee based on assets under management rather than paying transaction-based commissions for each trade. Depending on the arrangement, additional compensation may apply for certain products or services.

Also known as traditional brokerage accounts. This option may be more appropriate for accounts implementing a "buy and hold" strategy where constant investment oversight or high frequency rebalancing* across different asset types might not be needed. A traditional brokerage account could also be more suitable for accounts with conservative, cash alternative objectives where money market funds, brokered CDs, or ultra-short bond funds may be appropriate. These investments are conservative in nature and typically offer investors access without transactional commissions.

It's important to note that while traditional brokerage accounts can offer a wide range of investment options, advisors and brokerage firms are compensated through commissions charged upon the transactions executed in these accounts. It is also important to remain aware of potential conflicts of interest that could result from this type of commission structure. Always ensure that your advisor acts in your best interests and fully discloses any fee or commission associated with your account before an investment decision is made.

Also known as advisory accounts, fee-based accounts may be appropriate for investors who value ongoing investment management, portfolio monitoring, and regular rebalancing* across different asset classes. Investment vehicles may include, but are not limited to, mutual funds, exchange-traded funds, individual stocks, and bonds.

An advisory investment account involves providing ongoing investment management and financial guidance for a predetermined fee. Our advisory fees are based on assets under management and the services provided. The following schedule outlines our general advisory fee structure based on account size:

Account Assets  -  Account Fee

$0 - $99,999  -  1.09%

$100,000 - $249,999  -  0.99%

$250,000 - $499,999  -  0.89%

$500,000 - $999,999  -  0.79%

$1,000,000 - $1,999,999  -  0.69%

$2,000,000 - $4,999,999  -  0.59%

$5,000,000 +  - 0.50%

The terms fee-only and fee-based describe how a financial advisor is compensated, but they are not interchangeable.

A fee-only financial advisor is compensated solely through fees paid directly by clients for advisory services. These may include ongoing account management fees under an advisory relationship or one-time fees for a specific service, such as creating or reviewing a financial plan, without providing ongoing investment management or financial advice.

A fee-based financial advisor may offer both advisory and commission-based services. With an advisory relationship, the client pays an ongoing fee based on assets under management. With a commission-based brokerage relationship, the advisor is compensated through commissions on applicable transactions or investment products rather than charging a separate ongoing advisory fee based on assets.

Understanding these differences can help investors evaluate how their advisor is compensated.