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Choosing an Advisor: Fee or Commissions?

When hiring an investment advisor, it can be sometimes difficult to discern the complex compensation structures available. No matter what your financial goals are, it's critical for you to understand exactly how your advisor is compensated before you enter any agreement so that you can make an informed decision.

How Advisors Get Paid

Advisors are typically compensated in three ways.

1. Fee-only: this means that the advisor's sole source of income is from fees paid directly from clients. These fees make take the form of an hourly rate, flat project fee (such as for a financial or retirement plan), or a percentage of assets managed (typically 0.75% to 2%, or sliding scale).

2. Commission-only: advisors earn income by selling financial products such as stocks, bonds, mutual funds, insurance, or through trading. Sales charges can range from 1% to 6%.

3. Fee-based: an advisor collects a combination of fees and commissions. This usually means that the advisor charges a fee for advice and then earns commissions on investments or products they sell.

Which is Best?

The answer will largely depend on your unique goals and objectives. However, the demand for fee-only advisors has significantly increased over the past few years because investors are pushing for advice that is independent and unbiased.

True fee-only advisors receive no compensation from any product they recommend, and they are required to disclose all fees. This means you don't have to wonder if their recommendations are being influenced by commissions or other enticements. The advisor's advice is objective and his/her interest is more closely aligned with yours.

Another advantage of working with a fee-only advisor is that they tend to offer high-level personalized service and can provide you with a wider variety of choices because they're not limited to recommending firms offering attractive incentives. You will find that fee-only advisors tend to favor low-cost/high value solutions such as no-load mutual funds.

Finally, most fee-only advisors analyze your entire portfolio, so he or she is most likely to be educated in different asset classes in addition to other financial areas such as taxes, wills and trusts, retirement, and insurance. Armed with this knowledge, they are able to provide you with a complete financial picture.

In closing

Be sure to carefully evaluate your advisor's fee structure. Get your fee arrangements in writing and review reports from your advisor and custodian on a regular basis. Don't be afraid to ask for clarification when you don't understand something. A qualified advisor will be more than happy to educate you.

For information about the Girard Partners compensation structure, see our FAQs section.