Fee-Only vs. Commission-Based Financial Advisors

It’s critical to hire a financial advisor who’s both trustworthy and worth the cost. A good professional can help you stay on track with your goals and avoid crucial mistakes. But because there are different types of advisors, each with their own methods of compensation, it can be challenging to determine which one is the right fit.

One of the most notable distinctions you’ll run into is whether an advisor is “fee-only” or “commission-based.” These terms refer to how an advisor earns their income and can influence the advice you receive. In this guide, we’ll explain what each model means, highlight the differences, and provide you with the tools to determine which type of advisor best suits your needs.

What Fee-Only and Commission-Based Mean

Fee-only and commission-based describe how a financial advisor earns compensation. They determine the format in which you’ll pay fees and how it can shape the trajectory of your advisor-client relationship.

When a professional is fee-only, it means they’re paid directly by clients for services they provide. This can take many forms, including an hourly rate, retainer, or percentage of assets under management (AUM). Because their income doesn’t rely on selling you products or services, these types of advisors may be less prone to compensation-related conflicts of interest.

Conversely, a commission-based advisor earns money by selling you a financial product, such as an annuity, life insurance policy, or mutual fund. This arrangement may appear less expensive at first; however, costs tend to integrate into the products themselves.

Fee-based, or hybrid, advisors combine the two approaches, earning both fees and commissions. This model is common but can be confusing, so it’s important to ask clear questions about what you’ll pay and when.

How the Way Advisors Get Paid Affects Their Advice

How your financial advisor earns compensation can shape the services and advice you receive. While that isn’t to say one is better than the other, the fee structure can have a profound impact on the objectivity and type of services an advisor offers.

When a financial advisor earns a commission, services may appear cheaper up-front because they earn from incentivized products. This, naturally, can create a conflict of interest and bias within the advisor-client relationship. According to Brad Clark, founder and CEO of Solomon Financial, this is typically the case. “I would say from real world experience, a commission-based advisor is more likely to try and put every client into the same type of products,” he says.

On the other hand, a fee-only financial advisor may deliver less biased advice. While some may still be present, the consensus is that they offer advice with fewer conflicts. Clark notes, “The assumption of all of these [fee-only structures] is that [they] will give less biased advice since they make the same amount regardless of what the client actually does.”

Fee-only structures, while potentially costing more, can also open up a range of options for how you want your relationship to work. You can often choose between many different models, including:

• Hourly for one-off or specific advice.
• Retainer for any larger projects or ongoing needs.
• Percentage of AUM for in-depth management of your portfolio or wealth.

What Each Might Cost You

Costs for financial advisors vary drastically depending on the fee model. Below is a short table that breaks down what you might pay for various fee-only models or a commission-based approach:

Compensation Model	How It Works	Typical Costs
Hourly (Fee-Only)	Pay for advice as you need it	$200-$500 per hour
Flat/Retainer Fee (Fee-Only)	Ongoing financial advice	$2,000 to $7,500 per year
AUM (Fee-Only)	Percentage of portfolio charged annually	0.25% to 2% of assets (equates to $2,500 to $20,000 per year for $1 million)
Commission-Based	Advisor earns money when you buy products	1% to 8% sales commission on investments or premiums
Hybrid (Fee and Commission)	Blend of flat/AUM fees and commission products	Can vary significantly

Misconceptions to Consider

As you weigh a fee-only or commission-based advisor, it’s vital to consider misconceptions that may skew your point of view. Being aware of these will help you decide whether to seek guidance from a financial professional.

First, and perhaps most importantly, is the misconception that “fee-only means you are getting unbiased advice,” says Clark. He adds, “Every advisor has a bias. The real question is, are they willing to admit their bias and help you at least understand the other options?” As you judge a professional, it’s nearly as important to assess how they communicate with you as their fee structure.

Another false assumption, according to Alajahwon Ridgeway, EA, MBA, CPWA^®, CDFA^®, owner at A.B. Ridgeway Wealth Management, is that “fee-only is only for the rich.” While this structure may come at a higher cost in some arrangements, there’s plenty of opportunity for flexibility, such as through an hourly rate or a tiered AUM structure.

Ridgeway also warns against fully believing that “commission-based advisors are all sleazy salesmen disguised as financial advisors.” While there may be bias in the products they recommend, the quality of their advice isn’t necessarily compromised. As a client, you just need to be aware of these biases and understand what it may mean for you.

How to Choose the Right Fit

The right type of advisor for you depends on your situation. Fee-only and commission-based advisors each bring unique benefits and downsides to the table, which may be a better fit for people with different needs.

If you’re someone with a large portfolio, complex finances, or in need of long-term planning, a fee-only advisor can provide ongoing support and flexible costs. You’re also likely to feel more confident that you’re receiving objective advice from a fiduciary, a professional who must act in your best interest.

For those just starting out or with a smaller account, commission-based advisors are an option with lower upfront costs. Large firms, such as Edward Jones, offer this model as an introductory tier.

Some advisors also follow a hybrid or fee-based model, combining both fees and commissions. This can work well if you want the flexibility of product access along with planning support, but it also makes it harder to know exactly where your advisor stands regarding objectivity. If you go this route, be sure to ask clear questions about how and when they’re compensated.

To make the choice easier, here’s a quick comparison of the three models:

Factor	Fee-Only Advisor	Commission-Based Advisor	Hybrid Advisor
Best For	Long-term planning and larger portfolios	Beginners or small accounts	Those who want planning and access to specific products
How You Pay	Flat fee, hourly, or percentage of AUM	Integrated into product sales	Combo of fees and commissions
Conflict Risk	Lower, advisors earn same regardless of investments	Higher, since product sales drive incentive	Depends on overall compensation arrangement
Cost Range	$200 to $500/hour; $2,000 to $7,500/year flat; 0.25% to 1% AUM	1% to 8% upfront commission on products	Can vary significantly

If you’re unsure where to start, this free matching tool can help connect you with a fiduciary advisor based on your goals. After a short quiz about your current situation and goals, it’ll pair you with an expert who suits your needs.