Key Points

• Financial advisor compensation models vary significantly, making it difficult for clients to know how much they’re paying for their advisor’s services.

• There are 3 main models a financial advisor can use for compensation: commission based, fee based, or fee-only.

• The fee-only model is best at providing a clear, easily understood structure while also limiting an advisor’s conflicts of interest. We believe this is the better client experience.

As the financial advisory industry has grown and evolved over the past few decades, so too has advisor compensation options. Unfortunately, some of these options make it extremely difficult for the client to know how much they’re paying for financial services. Let’s review the 3 main compensation models a financial advisor can use.

1. Commission-Based Financial Advisor

The first and oldest model is “commission-based” compensation. Commissions are usually based on a percentage of the sale price of a financial product. These commissions are included in the product cost, so you wouldn’t know they’re being charged. Annuities, mutual funds, private investment partnerships, and insurance policies are products that often have commissions.

There are inherent conflicts of interest in the commission-based model. Advisors are incentivized to recommend certain financial products regardless of whether they’re a good fit for the client. An advisor can potentially earn more by recommending specific products or by recommending more products. Commission terms can be hard to find and understand, making it unclear how much someone is ultimately paying their advisor. Lastly, advisors using a commission-based model are likely operating under the “suitability standard of care” rather than a “fiduciary standard.”

2. Fee-Based Financial Advisor

The second model is called “fee-based” compensation. In this arrangement, there’s a set fee schedule in addition to allowing commission-based products. In addition to the potential of a commission-based conflict of interest, an advisor could also receive “referral” or “soft-dollar” fees behind the scenes from third parties. This would occur either when an advisor recommends the specific service providers (like an accountant or lawyer) or when using certain custodians (the company that holds your securities). The fees could also involve commissions or charges imbedded in different investment products, such as fund load fees or 12B-1 fees. These types of fees  do not tend to be clearly disclosed, leading to a lack of transparency on the total cost of the services or investments provided.

3. Fee-Only Financial Advisor

The third model is “fee-only” compensation. This is the only model where advisors aren’t allowed to receive any commission or third-party fees. The advisor charges the client an annual fixed percentage fee based on assets under management (AUM) or a fixed-dollar retainer fee. The fee-only model avoids all the different fee types and conflicts of interest that occur in the other two models.

Pros of fee-only financial advisor services:

• Best align with client interests

• Cost the least while providing comprehensive service

• Clear, easily understood payment structure

• Limit an advisor’s conflicts of interest

• Create a better client experience

Capstone Advisors Has Always Operated on Fee-Only Compensation

As a fiduciary to our clients, we strongly believe that fee only is the best way to ensure clients receive quality service at a fair price. As a Registered Investment Advisor (RIA), Capstone gives clients peace of mind through fair pricing, no hidden fees, and objective, client-focused advice.

Contact us today in Downers Grove, IL or from anywhere across the country to learn more about our fee-only advisor services.

Disclosures:

This article is not a substitute for personalized advice from Capstone and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed by other businesses and activities of Capstone. Descriptions of Capstone’s process and strategies are based on general practice, and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.