Advisors are compensated in several different methods. Fee-Only is the ideal method for retail investors searching for a financial advisor.
Advisors at major financial institutions, such as Merrill Lynch and Morgan Stanley Smith Barney are Fee-Based. Most investors confuse Fee-Based with Fee-Only. Although they might sound alike, they are different in many ways. With Fee-Based, the advisor charges a flat management fee plus other fees such as transaction fees, sales charges, miscellaneous expenses, and also commissions on products they sell to their client in their asset allocation recommendations. These advisors are very keen to push their own firm's products as it is one of their main means of income. The large full-service brokerage firms have profit sharing agreements in place with their advisors to cover all these expenses and to earn a living, the advisors have to charge a hefty management fee. On average, a Fee-Based advisor charges 150 to 300 basis points. With these types of advisors, client's interests take a back seat to the firm’s and advisor’s needs.
Commission-Only is very similar to Fee-Based, but commission-only advisors do not charge a management fee. They work strictly on commissions. Their main objective is to sell proprietary investment products. Their only incentive for dealing with an investor is that the investor might purchase one of their commissioned products. This type of a mindset might lead to bad advice. If you do not buy their products, they do not make a commission. Due to the nature of their business, their attention towards a client’s needs is very minimal. On average, Commission-Only advisors end up charging about 200 to 300 basis points annually. Along with commission they earn, they also charge fees very similar to Fee-Based advisors. Their commission is in addition to the transaction costs, sales charges, and other miscellaneous expenses a client incurs.
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