Your financial adviser’s overriding duty is to maximize your return on investment year after year. All other considerations, including the adviser’s own earnings, are secondary.

Right?

Not necessarily. Financial advisers have to make money somehow, or they wouldn’t be in business to help you make money.

Commission-Based vs. Fee-Only Advising: What’s the Difference?

One of the financial planning industry’s many fault lines opens around the question of advisers’ compensation for the services they provide.

Some advisers earn money from commissions on sales of equities and other financial products. They’re known as ‘commission-based advisers.’ They often have other sources of income, including kickbacks from the funds they recommend. Commission-based advisers aren’t always required to disclose such kickbacks, and many don’t, so it’s not always clear to clients when they’re subject to charges that eat into their returns.

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Reputable fee-only financial advisers don’t take commissions or kickbacks from funds. Instead, their recurring fees (usually paid quarterly or annually) are calculated as a percentage of their clients’ total assets under management (AUM). Investment management fees typically decrease as AUM increases — for instance, a retail fee-only adviser might charge 1% on assets under £500,000, 0.75% on assets between £500,000 and £1,000,000, and 0.50% on assets above £1,000,000.

Which Is Better?

By definition, fee-only financial advisers earn money through fees only. Their compensation structures are inarguably more client-friendly. If you’re looking for an adviser that won’t nickel-and-dime you, fee-only is the way to go.

The proof of fee-only financial advisers’ superiority is in the tape. In the 1970s, fee-only financial advisers were virtually unheard of. Today, they’re everywhere, and growing more common by the day.

Why? Simple. They treat clients better and their investments tend to perform better year after year — though past performance is not necessarily determinative of future results.

Questions to Ask Financial Adviser Candidates

Now that you have a basic understanding of the difference between commission-based and fee-only financial advisers, you’re ready to begin researching and evaluating prospective advisers. Use these questions to hone in on the right fit for your needs.

• How are you compensated? Fee-only advisers are increasingly the gold standard for long-term investors. Choose accordingly.
• What is your investing philosophy and approach? Some advisers hew to a passive approach that seeks merely to match the market. Others use active investing strategies to beat the market. Your appetite for risk will determine which approach you favour.
• How have your clients’ investments performed over time? Don’t enter into an adviser relationship without carefully evaluating their investments’ short-, medium-, and long-term performance.
• Are you a member of any professional financial advising or planning organizations? A stamp of approval from reputable organizations like the Financial Conduct Authority helps assuage concerns about legitimacy and experience.

Remember, investing for the long haul is a marathon, not a sprint. You won’t do yourself any favours by rushing into a relationship with a new financial adviser.