What is the difference between 'Commission-Based', 'Fee-Based', and 'Fee-Only' When it Comes to Financial Advising?

Commission-based is as it sounds, an advisor or agent is compensated mainly by earning commissions on products they sell. They may also earn bonuses and incentive vacations by meeting quotas on certain products. Just because an advisor is commission-based does not mean they are unethical. However, commissions to create conflicts of interest. It makes you wonder whether they are recommending a product because it's right for you, or it's right for them.

Fee-Only is on the other side of the spectrum. Fee-Only means no commissions. A Fee-Only advisor is compensated 100% from his/her clients in the form of financial planning and investment management fees. They do not accept kickbacks or other incentives for recommending certain investments or products. Their incentive is to provide you good service and advice so you continue working with them. Fee-Only is considered to be better aligned with the client and their goals. It also has the least conflicts of interest.

So what is Fee-Based? Fee-Based is an advisor who is compensated in the form of fees for financial planning and investment management, AND commissions for investments and insurance they sell. Most advisors are fee-based. While they may emphasize that they work on fees, they can also recommend products that they earn a commission on. There are more conflicts of interest because of the ambiguous nature of the business model. “How am I paying for advice? Are they working for me, or are they trying to sell me something?”