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If you are in the market for a new financial advisor, you may have done a quick Google search and found that there are different subsections of advisors based on how they are compensated. So what exactly is the difference between a fee-only financial advisor, a fee-based financial advisor, and a commission-based financial advisor?
As it turns out, there is a big difference between these three types of financial advisors. And understanding the compensation structure of each financial advisor is a critical component to making the right choice for whom you choose to oversee your long-term wealth management strategy.
At Calamita Wealth Management, we are a fee-only wealth management company, focusing on providing wealth management solutions to individuals who are nearing retirement and thinking about the next step in their lives. We firmly believe that being a fee-only wealth management company provides our clients with distinct advantages, as we offer advice and strategies that are right for our clients and are not based on commission. We know that the fee-only financial advisor compensation model is the only compensation structure for financial advisors that obligates the advisor to put their clients’ needs before their own.
Below we have outlined the different types of compensation for financial advisors and highlighted the benefits of being a fee-only financial wealth management company.
Financial advisors typically fall into one of three categories: fee-only financial advisors, fee-based financial advisors, and commission-based financial advisors. As the name suggests, fee-only financial advisors are compensated through a predetermined fee, while commission-based and fee-based financial advisors are compensated at least partly through commissions earned from the selling of certain products and through certain financial transactions.
There is also a distinct difference between a fee-only financial advisor and a fee-based financial advisor. Fee-only financial advisors receive their compensation from fees paid from the client to the advisor. Additionally, fee-only advisors have traditionally been held to a fiduciary duty to protect their clients’ interests before their own.
Fiduciary duty sounds like a good thing, but what exactly does it mean? Simply put, a financial advisor who has fiduciary duty to his client has a legal responsibility to put the interests of his client before his own. This means that if your financial advisor is a fiduciary, he must act solely in your best interests or face legal consequences. A fiduciary must live up to clients’ trust in them through transparency and minimizing conflicts of interest.
Fee-based financial advisors are generally compensated by both commissions on the sale of certain products and fees for their advice, which typically includes guidance on which financial product the client should buy from them. Some critics have noted that both fee-based and commission-based financial advisors have an inherent conflict of interest because these types of financial advisors work on commission and are predisposed to promote products from which they will benefit financially.
Fee-only advisors provide clients with unbiased and comprehensive financial advice that solely benefits the client. In addition, they are required to conduct their business under a fiduciary duty, and many of them also carry professional designations that hold them to strict professional standards.
While any commission-based financial advisor will have a strong impetus to sell clients on products or financial services that will benefit the advisor, the fee-only compensation structure allows the advisor to operate with more transparency and recommend products or services with no bias.
Do you need a financial advisor that puts your interests before their own? At Calamita Wealth Management, we specialize in doing just that, and we are well versed in creating unbiased and solid wealth strategies for our clients. Schedule an introductory phone call using our online calendar or reach out to us at (704) 276-7325 or firstname.lastname@example.org.
Fee Only Network
National Association of Personal Financial Advisors
Todd Calamita is the founder and managing principal of Calamita Wealth Management, an independent, fee-only wealth management company located in Charlotte, NC, serving people locally and across the country, that focuses on providing wealth management solutions to affluent individuals over age 50 and their families. Todd has more than 20 years of experience in the financial services industry and is passionate about helping people have a better life by designing and implementing customized financial plans that bring clarity and confidence. Todd is a CERTIFIED FINANCIAL PLANNER™(CFP®) and CERTIFIED DIVORCE FINANCIAL ANALYST® (CDFA®) and holds a Bachelor of Business Administration from Ohio University and a Master of Business Administration from the Weatherhead School of Management at Case Western Reserve University. He has authored a book, Plan Smart: Conquering 10 Common Money Traps, as well as numerous articles on wide-ranging personal finance topics, from taxes to retirement accounts. He has also been featured in a Financial Boot Camp TV series as a volunteer showing people how to make smart decisions with their money. When he’s not working, you can find Todd spending time with his wife, Teresa, and their two sons, Colin and Cameron. He enjoys rock climbing, swimming, and traveling, and he has a black belt in Tang Soo Do, a Korean martial art. To learn more about Todd, connect with him on LinkedIn.