Understanding Fee-Only, Fee-Based, and Commission-Based Advisors
Which Compensation Model Is Best for Maryland Investors?
Understanding how financial advisors are compensated is essential for investors evaluating long-term advisory relationships. The distinctions between fee-only, fee-based, and commission-based advisors influence not only how professionals are paid, but also the potential for conflicts of interest and the standards they are held to. Here are some key differences among these compensation models to help investors make informed decision.
When it comes to choosing who to turn to for financial planning advice and services, it is paramount you are clear on the type of advisor you are working with because not all financial advisors are created equal.
Commission – Only Financial Advisors
Commission-only financial advisors only make money when they sell investments or a certain financial product to clients. They are often employed by broker-dealers and are only held to a “suitability standard.” Commission-based advisors receive a percentage of the sales they generate, such as specific mutual funds, insurance products, or other investment products.
There is a higher potential for conflicts of interest due to the link between their compensation and the sale of financial products. The client relationship tends to be more short-term, as the advisor is incentivized to move on to the next client to sell more products.
Examples of those who may fall in this category are insurance agents, stockbrokers or financial representatives who work at brokerage firms such as JP Morgan, Morgan Stanley or Merrill Lynch, a financial advisor who sells annuities or insurance products.
Key characteristics of Commission-based advisors:
- Paid by product providers for selling investments, insurance, or annuities.
- Typically held to a “suitability” standard—not fiduciary.
- May offer products from a limited menu of providers.
Why it matters: Because they are incentivized by commissions, their recommendations may not always be in your best interest. Products suggested may be “suitable” but not optimal for your goals or cost efficiency.
Watch for:
- Proprietary products or incentives tied to specific offerings.
- Lack of transparency in disclosures.
- Pressure to purchase bundled services or insurance.
Fee-Based Financial Advisors
Fee-based advisors may earn like fee-only advisors, but they may also earn commissions or referrals. They may offer services like investment management, financial planning, or ongoing advice, but will position themselves to sell products such as life insurance, annuities, firm proprietary products, and certain mutual funds.
The primary distinguishing factor is that a fee-based advisor has a dual compensation model. A primary concern with this type of advisor is since they can earn commissions from the sale of financial products, they may be incentivized to recommend products that provide higher commissions rather than others that may be more in the client’s best interest.
Many advisors only have a legal fiduciary duty when operating in a “fee” capacity. They are held to a “suitability” standard, which means that investment products such as an annuity or mutual fund sold for commission must be suitable for the client but need not be the BEST possible investment product to meet the client’s needs. Fee-based advisors typically work for large banks, insurance companies, or institutional firms like Ameriprise, Morgan Stanley, or JP Morgan.
Key characteristics:
- Compensation may include a combination of client fees and product-based commissions.
- May act as fiduciaries when providing advice—but not always.
- Must disclose conflicts of interest, but aren’t necessarily required to avoid them.
Why it matters: This hybrid model can be confusing. While some advice may be objective, compensation from product sales may influence recommendations. It’s important to ask how the advisor is being paid at every step.
Questions to ask:
- Do you receive commissions from product providers?
- Are you acting as a fiduciary when making this recommendation?
- How are conflicts of interest disclosed and managed?
Fee-Only Financial Advisors
Fee-only financial advisors only make money from client fees. They may offer a range of services including financial planning, investment management, 401(k) or 403(b) advice, ongoing financial advice, or fee for service financial advice. It may be structured as flat or hourly or as a percentage of assets managed.
They do not earn commissions on investments, nor do they receive a fee when you buy or trade securities. They have fewer conflicts of interest than other advisors but still must disclose any conflicts they do have. Fee-only advisors are held to a “fiduciary” standard, which requires that the advisor put their client’s interests first and foremost.
Key Concepts
The key concept to remember is that fee-only advisors only get paid by YOU, so they work exclusively for YOU. All certified financial planners (CFPs) are required to act as a fiduciary per the Certified Financial Planner Board of Standards.
Key characteristics:
- Compensation comes directly from client fees (hourly, flat, or percentage of assets under management).
- No commissions from product sales or third-party providers.
- Typically held to a fiduciary standard, meaning they are legally obligated to act in the client’s best interest.
Why it matters: This model minimizes potential conflicts of interest. Because a fee-only advisor does not benefit financially from recommending certain investments, their guidance is more likely to align with your long-term goals.
It can be tricky to determine whether an advisor is fee-only or fee-based. Do your homework and check their ADV. Form ADV is a compliance document the advisor is required to file and disclose on their website. This document will state whether the advisor is fee-based or fee-only, the size of the firm, and list other business activities in which they may participate. It will also cite whether there has been any disciplinary action brought against them.
Make sure whoever you work with is a true fiduciary, that you feel comfortable with them, that you agree with their investing philosophy, and that they look at your entire financial picture (not just your investments). If you are interested in working with a fee-only registered investment advisor fiduciary, please contact us at 410-840-9200 or visit us at www.mainstadvisors.com.
Sources:
NerdWallet. (March 7, 2025). Fee-Only vs. Fee-Based Financial Planner: Key Differences
https://www.nerdwallet.com/article/investing/fee-only-vs-fee-based-planners
Smart Asset. (June 6, 2024). Fee-Based vs. Commission-Based Financial Advisors.
https://smartasset.com/financial-advisor/fee-based-vs-commission-financial-advisor
Bankrate. (February 19, 2025). Fee-only financial planners vs. fee-based.
https://www.bankrate.com/investing/financial-advisors/fee-only-vs-fee-based-planners/#fee-only-financial-planner
