There are three primary types of third party or commission-based compensation: commission-only, fee-based commission, and fee-offset commission.
How an advisor is compensated can be a very important issue. With commission-only advisors, there is no direct cost to the client for planning and advice. The advice appears to be free, but it is not. Most clients find that ‘planning’ conversations focus quickly on the purchase of products through a commissioned advisor.
When choosing an advisor, individuals should first decide the type of advisor compensation that makes them most comfortable. How an advisor is compensated can be a very important issue. When you hire a financial planner or investment advisor, 1) you pay directly for his services, 2) a third party pays your adviser for you, or 3) these compensation methods are combined.
This article focuses on third party paid compensation, which is by far the most prevalent method of adviser compensation.
For information on client paid advisor compensation, see: Financial planner and investment advisor compensation paid by clients For The Skilled Investor’s judgment on preferred advisor compensation arrangements for individual investors, see, Does it matter how financial planners and investment advisors are paid? and Fee-only compensation aligns the interests of clients and their financial advisors.
There are three primary types of third party or commission-based compensation:
Commission-only: A third party pays commission fees, referral fees, or other fees to your advisor, and you pay nothing directly. Fee-based commission: Your advisor accepts commissions and fees from third parties in addition to fees he charges against your assets. Fee-offset commission: Your advisor accepts commissions and fees from third parties in addition to fees he charges against your assets. Your advisor rebates to you some or all of the fees he receives. With commission-only advisors, there is no direct cost to the client for planning and advice. This makes third party compensation appealing to many people – it appears to be free.
Many individuals do not want to pay for directly for advice. By avoiding direct payments to an advisor, they hope that they will get a better deal. In addition, commission-only advisors argue that individuals only pay, when clients choose to follow the advisor’s recommendations.
Since commission-only advisors are not paid unless they sell products, most clients find that ‘planning’ conversations focus quickly on the purchase of specific investment and financial products through the advisor. When the client buys a product, such as [...]