The Advantages of Working With Fee-Based Financial Advisors
Some financial advisers are commission-based, which means they get paid in part for purveying certain insurance, mutual fund and other financial products. Fee-based advisers receive their compensation from clients for investment and financial planning advice. The advantages of fee-based financial service are independent advice, simpler cost structure and greater diversification.
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Independence
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According to the National Association of Personal Financial Advisors, which is the industry trade group for fee-based financial advisers, the more an adviser depends on commission income, the greater the possibility of a conflict of interest. This conflict may cost investors in terms of the quality of the advice and portfolio underperformance relative to major market indexes.
Commission-based advisers may recommend only those products that pay high commissions, not necessarily those that are likely to produce superior investment returns for a particular client. There is better alignment of interests between fee-based advisers and investors, University of Mississippi law professor Mercer Bullard told writers Karen Damato and Jaime Levy Pessin in a February 2010 "The Wall Street Journal" article. The writers also suggest that fee-based advisers have a fiduciary obligation to place the interests of their clients above their own, which is not necessarily the case for commission-based advisers. However, James Wiggins, a spokesperson for investment firm Morgan Stanley Smith Barney assured Damato and Pessin that its advisers work in their clients' best interests regardless of the compensation structure.
Costs
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Fee-based advisers may charge an hourly rate, an annual retainer, a percentage of the assets under management or a combination. Fee-based advisers are under no pressure to recommend mutual funds with high commission structures, which can mean savings for investors. A fee-based adviser has less incentive to churn an account, which means excessive trading or replacing one mutual fund with another that pays higher commissions. Damato and Pessin suggest that fee-based relationships usually mean more transparency because investors know the adviser's fees and expenses upfront.
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Diversification
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Investors usually benefit from access to a broader range of assets when they deal with fee-based advisers. Commission-based advisers may recommend only those mutual funds and other financial products that generate the highest commission income. Advisers at banks and other financial institutions may recommend in-house mutual funds and related products, which may not be the best investments for an investor. Jason Thomas, chief investment officer of Los Angeles-based money manager Aspiriant told Damato and Pessin that financial institutions might receive compensation from fund-management companies for recommending specific products. Fee-based advisers may not be under similar constraints, meaning that investors could have access to a wider selection of stocks, index funds, bonds, mutual funds and other financial products.
Considerations
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Some fee-based advisers may receive commissions from mutual fund companies and insurance companies in addition to the fees they charge investors. Investors should do their due diligence because they could end up with higher costs. A CNN Money article titled "What Should It Cost?" suggests that fee-based advisers may encourage people to invest rather than pay down debt or take other cost-saving measures, which can be just as important for long-term financial security.
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