Great question! This can be a confusing topic for those outside the investment industry. I’ve worked as a fee-based advisor, commission only advisor and now work as fee-only advisor. The easiest way to explain this is to review all three side by side.
The first difference is compensation.
Fee-only advisors work for their clients and ONLY get paid directly from them in one of three ways: an hourly rate, a fixed annual retainer or a percentage of the investment assets they manage for their clients.
Commission only financial advisors get compensated from the companies offering the mutual funds, annuities, life insurance, REITs etc. you buy from that advisor. The more transactions they do the more they get paid.
Fee-based advisors blend the commission only and fee only models. They may sell you a product and get a commission on the transaction or they may charge you a percentage of assets to manage your portfolio or they may do both.
The second difference is what standard of care they follow.
Fee-only advisors follow the Fiduciary Standard to always act in the best interest of the client. They must follow a duty of loyalty and care to their clients, disclose any conflict of interests, get the best execution possible when investing and do a thorough and accurate analysis of their recommendations.
Commission only advisors follow the Suitability Rule. They can sell products to their customers that they believe meets the customers’ needs and objectives. They do not follow a duty of loyalty to their clients but instead are first loyal to their employing broker/dealer. Also, they do not have to disclose conflicts of interest.
Fee-based advisors follow either the Suitability Rule or the Fiduciary Standard depending on the situation. Unfortunately, you can never be exactly sure which standard they’re following when they’re making recommendations.
In my humble opinion, a fee-only advisor is your best bet.