A Working Model

In the investment business, there are three basic models that firms utilize to deliver investments and/or advice to their clients.  They don't all work well for investors.

Let's start with the commission model.  In this model, the advisor (known as a 'Registered Representative' of a 'broker-dealer' firm), is compensated for the investments that are utilized.  Many securities, including virtually all annuities and life insurance, are sold this way.  Those commissions pay the advisor an up-front, often substantial amount, which the investor ultimately repays directly or indirectly via account deductions.

Another model is called fee-based, and it's essentially the commission model with a twist.  That is, these advisors usually have licenses which also allow them to give advice for a fee, in addition to their Registered Representative licenses. These dual-licensed advisors are called fee-based, because they can provide investment advice for a fee, but they primarily continue to utilize commission-based compensation for making a sale.

The third model is the fee-only model. Practitioners of this model are licensed as Investment Advisor Representatives (IAR) of a Registered Investment Advisor (RIA).  Many of them also have attained the Certified Financial Planner® professional designation.  The term 'fee-only' acknowledges that they are only compensated by the transparent, negotiated fees (not unspecified commissions) their clients pay.

Unfortunately, most advisors aren't fee-only, even though that model makes the most sense for those seeking help.  Consider the possible conflict of interest when a commission-based advisor sells an investment product -- can the investor truly know if the size of the commission impacted the sale?  By not receiving commissions for the investments recommended, a fee-only advisor eliminates this uncertainty.

Also, since commissions are paid up-front, what is that advisor’s incentive to provide ongoing client-service?  Fee-only advisors charge a flat amount, or a percentage based on the assets they manage -- but in either case, it isn't paid until AFTER the work is done.  Since this fee is only a fraction of the commissions that would otherwise be paid, the fee-only advisor must continue to work diligently, as the client can end the relationship at any point.

I am a fee-only advisor.  I remove the conflicts of interest that could otherwise exist between investors and advisors, because our interests are the same.  That shared interest shapes how we interact, to create and maintain the trust needed to successfully work together.