Financial advisors specialize in helping you take care of your finances. They can be a big help, especially if you don’t have the time or expertise to do so yourself.
Financial advisors can make creating a plan for your future easier, including how much money you’ll need in retirement and the appropriate risk if you are considering building an investment portfolio.
Financial advisors are essential if you want to build your savings efficiently. These experts can serve as unbiased third parties who can help you understand your financial situation and guide you to make the best financial choices.
There are two primary types of financial advisors, each with distinct pros and cons: commission-based and fee-based financial advisors.
If you are looking to avail the services of financial professionals, this blog may be for you. Here are some things to consider when choosing which type of financial advisor best fits your situation.
Fee-based vs Commission-based Financial Advisors: Key Differences
Before discussing the two financial advisor types in-depth, it is vital to know what they are.
Fee-based Financial Advisor
A fee-based financial advisor charges a percentage of the assets they manage rather than taking commissions. Simply put, the client pays them directly. They base their fees on an hourly rate or a value percentage of the assets they oversee.
Fee-based advisors are often independent contractors or self-employed consultants.
However, some may work for a company that provides investment research, portfolio management, and retirement planning services to clients of all sizes. The fees they charge can vary significantly based on the client’s portfolio size and the services’ complexity.
Commission-based Financial Advisor
On the other hand, a commission-based financial advisor is a person who works for a company that sells investments, mutual funds, and other financial products. The advisor earns a commission on product sales or from flat fee charges to their clients.
Like its fee-based counterpart, commission-based financial advisors help you manage your finances. However, they go about it by offering you certain products or services of financial aid companies.
Benefits of Hiring a Financial Advisor
Financial advisors offer many options to help you make the most of your money. They can provide investment advice, retirement and estate planning, and more. Here are some benefits of enlisting their services, whether fee- or commission-based.
1. Expert guidance in developing a financial plan
Financial advisors can help you create a budget and set goals. This way, you’ll know where your money goes each month.
They can also help you build wealth by urging you to invest in opportunities—like mutual funds or stocks—that can potentially grow over time.
2. Sound investment advice
As mentioned, a financial advisor can provide credible insight into what investments suit you and your risk appetite.
Moreover, financial advisors can also access various investment options available through multiple companies and platforms. They also have knowledge and experience with these products. As such, they can guide you on which option best suits your needs and goals.
3. Trustworthy management of your money and investments
Some people need help managing their finances because they don’t have enough time or don’t want to spend hours researching investment options weekly or monthly.
If you can relate to this sentiment, a financial advisor may be able to take care of everything for you. They won’t just hold on to your money. These expert advisors can also handle account tracking and make trades when appropriate on your behalf.
4. Professional tax advice
Tax laws change often and can be confusing if you try to do them yourself.
Having the help of an expert who knows how taxes work will help save you money in the long run. They’ll know exactly how much tax you owe on each transaction and can prepare returns accordingly, cutting costs.
Fee-Based vs Commission-Based: Which Advisor Is Better?
Now that you know the difference between commission-based and fee-based financial advisors, you may wonder which is right for you. If you are, here are some pros and cons of each type to help you make the best decision for your situation.
Fee-based Financial Advisor
1. They are typically more motivated to act in the best interest of their clients since their compensation is not based on the sale of specific financial products.
Clients pay commission-based advisors on how much money they invest with them and sell. In contrast, a fee-based advisor charges clients for their services.
This service-based model incentivizes fees-based advisors to help you make intelligent decisions about your money. Typically, this type of advisor puts your best interest in mind. They assist you in maximizing your money’s value instead of just trying to sell you something that sounds good at the time.
2. They may have a more comprehensive understanding of various financial products and strategies, as they are not limited to promoting a single company’s offers.
One of the biggest pros of hiring a fee-based financial advisor is their extensive knowledge of several financial products and strategies.
Fee-based financial advisors don’t just stick to the products and strategies one company offers. Due to this, they can freely offer any product or method that meets your needs. They can also compare and contrast different products before recommending them, giving you more informed advice.
1. The fees they charge can be higher compared to commission-based advisors.
In most cases, commission-based financial advisors earn their share based on the products and services they sell. So, it is in their best interest to promote more of them. This business model means they can offer you lower prices because doing so makes sense if they want more sales.
In contrast, a fee-based financial advisor charges you for their services directly. For this reason, they won’t have as much incentive to offer you lower prices or less expensive options.
2. The client may have to pay the fee even if they don’t follow the advisor’s guidelines, which can be troublesome if the plan doesn’t align with what the customer wants.
Another glaring con of hiring a fee-based advisor is that depending on your agreement, you may still have to pay fees. These fees may apply even if you don’t necessarily heed their suggestions.
These set fees can be incredibly frustrating. Your advisor may charge an ongoing basis for their services or an hourly fee for each consultation. These “retainer” or “bundled” fees may reduce your ROI, especially if you don’t implement their advice in your financial plan.
3. Clients with smaller portfolios may find it challenging to hire a fee-based advisor.
Fee-based financial advisors are great for people with more money. However, they may not be accessible to individuals with smaller portfolios.
Fee-based financial advisors charge a fee for their services. In other words, you have to pay them on top of what you already spend on costs to your brokerage firm. That’s not ideal for people starting with and possessing a small amount of money for investment.
Commission-based Financial Advisor
1. Commission-based advisors may be more motivated to make trades and investments.
One of the most significant benefits of hiring commission-based advisors is their increased motivation to make trades and investments on your behalf. The reason for their enthusiasm is that their income correlates with their performance.
The more money they make for you, the more they get paid. In their case, urging you to buy more services translates to more earnings on their part.
2. Commision-based advisors may be more accessible since they are not charging a flat fee.
Some often hire a commission-based financial advisor over their fee-based counterpart because they may be more accessible and affordable. Hiring a commission-based financial advisor doesn’t require any upfront fees. Instead, your advisor will receive a percentage of your transactions on their advice.
This system benefits people who want certain things accomplished and only want to pay for the service they receive.
3. Commission-based advisors may provide a broader range of financial products and services than fee-only advisors.
Commission-based advisors typically work for companies with valuable connections. As such, they may have access to more products and services than your average fee-only advisors.
Some people want to do their research and make their own decisions about what types of investments they want. Others may prefer that someone else handle all the details.
A commission-based advisor may be for you if you fall into the latter category and prefer near-endless options.
1. They may have a conflict of interest since they are being paid based on the financial products they sell to you.
The most significant drawback of hiring a commission-based financial advisor is the sales-centred incentive.
Some commission-based financial advisors want you to keep purchasing more so they can earn a hefty paycheck. This motivation can lead to less-than-ideal advice about your finances and investments.
2. They may be more likely to engage in high-pressure sales tactics or make trades that aren’t in their best interest to earn a commission.
Since financial advisors can generally control your finances with the proper authority, they can trade, sell, or keep your investments intact as they see fit.
You may benefit from this management in some instances. However, some commission-based advisors may choose to execute decisions for their benefit.
This situation starts a cycle of continuously needing financial advice, which bodes well for only one party. And that party may not be you.
3. They may be more expensive in the long run.
Fee-based financial advisors may be more expensive upfront. However, enlisting the services of a commission-based advisor may be more costly over time.
Since these advisors earn a commission on each trade or investment they make on your behalf, they may advise you to keep buying unnecessary products or services.
Fee-based vs Commission-based: Who gives Proper Financial Help?
Fee-based and commission-based financial advisors may perform the same core functions. However, they execute it in different ways.
You may be asking yourself, “which is better?” Unfortunately, it is not as clear-cut as you may expect.
It all depends on your current situation, goals, and needs. While one type of advisor may work best for you now, that may not be the case later. Constant reassessment of where you stand financially is essential when choosing one type of financial advisor over the other.
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Kendall Rendall is part of Vistica Wealth Advisors. It is a family-focused practice, serving individuals, families, and retirement plan sponsors.