The Skinny on Financial Advisor Fees & Commissions
If you have a financial advisor, it’s important to understand how he or she is charging you and how that affects your investments and the advice you receive. Not all advisors charge in the same way, and how they charge has an impact on the type of relationship you have with your advisor.
The two basic payment structures are fee-based and commission-based. With fee-based accounts, you pay fees to the advisor in exchange for ongoing advice by an advisor acting in a fiduciary capacity. With a commission-based account, you pay transaction-based fees and receive advice based on your profile. Though a commission-based advisor is not required to act in a fiduciary capacity, they are bound by suitability rules and a quality professional will ensure that your investments will remain true to your needs.
That’s a lot of information in one paragraph, so let me break it down for you.
How do fee-based accounts work?
If you have a fee-based account, you could be charged asset-based fees, service fees, and investment expense fees.
- Asset-based fees are charged on managed accounts and are based on the services you have been provided and the amount of assets under management in your accounts. The fees are paid in monthly or quarterly installments and deducted from the amount you invest in the managed accounts.
- Service fees may be charged for one-time requests and are deducted directly from the cash balance in your account. Examples of this type of fee include wire transfers or fees for returned checks.
- Investment expense fees may be required to cover costs of certain investment products. These are disclosed in the prospectus and/or the statement of additional information for the specific investment.
With a fee-based account, your advisor provides ongoing investment advice in a fiduciary capacity.
A fiduciary is a trustee who acts in the best interest of the client. In other words, when your financial advisor acts as a fiduciary, she or he must act in your best interest, not in the best interest of the firm or broker-dealer.
Your fee-based advisor will provide you with ongoing advice and professional investment management, including regular trading and periodic portfolio rebalancing.
How do commission-based accounts work?
If you have a commission-based account, you could be charged transaction fees, account maintenance or custodial fees, service fees, and investment expenses. Service and investment expense fees are described above. Transaction fees include commissions, sales charges, and other fees on products that are purchased and sold in your account.
With a commission-based account, your advisor will provide one-off recommendations related to your portfolio. This account may limit the types of investments you can make, but may be less expensive over time, depending on your specific needs and plan.
Why would I choose one over the other?
Choosing the best option for you can be tricky because fee-based accounts are more desirable in some situations while commission-based accounts are the best option for other situations. For example, you may want to conduct certain types of transactions and find that they aren’t available in a commission-based account. Or, you may calculate the cost of a fee-based account and find that it saves you money for the first five years, but after that is more expensive than the same transaction conducted in a commission-based account. The possible combinations are too numerous to cover in one article, so speak with your advisor. She or he can help you do the math and determine which account will cost you less in the long run based on your priorities and needs.
How do I know if I have a fee-based or commission-based advisor?
Before you meet with a financial advisor, it’s good to check online to make sure they’re legitimate. You can search for the advisor on BrokerCheck. There, you will find their years of experience, registrations, and more. You’ll also see if they are a broker, an investment advisor, or something else. If they are an investment advisor, they offer fee-based services. If they are a broker, they offer commission-based services. If they are both, you can talk to them about which account would make the most sense for you.
One final note:
By the end of June 2020, all registered broker/dealers will be required to comply with Regulation Best Interest. This regulation will require that all broker/dealers must only recommend financial products that are in their customers’ best interests. They must also declare any potential conflicts of interest or incentives that could influence their decisions. This rule will result in more disclosures, providing you, the client, with more information about your investments, including fees and commissions. It could also ensure that financial advisors, working with commission-based accounts, are still working in the client’s best interest. Though this rule is not as clearly outlined and enforceable as the fiduciary duty required for fee-based accounts, it is a move in the direction to create more consistency in service for both fee- and commission-based accounts.
Representatives are registered, securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor, which is not an affiliate of the credit union. CBSI is under contract with the financial institution to make securities available to members. Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial Institution Guarantee. Not a deposit of any financial institution. FR-2619564.1-0619-0721