Is A Fee-Only Financial Advisor Always A Better Choice Than A Broker Paid By Commission?

A fee-only financial advisor is not always a better choice than a broker. The job should determine the method of payment.

A lot of the marketing that is done by investment advisors and financial planners is focused on their form of compensation. “Fee-only” is often the primary message, placed right at the top of the home page, sometimes it’s even incorporated into the name of the firm. There’s nothing wrong with being a fee-only financial advisor, but investors should question whether or not that arrangement is always in their best interest.

The appeal of the fee-only message is that this form of payment removes the influence of transaction-based commissions or incentives. The idea is that if the advisor’s only form of compensation are the fees paid directly by the client, he is more apt to provide unbiased guidance. That idea has merit, but it’s also laughably superficial.

You’re probably better off paying a commission if:

  1. You are buying a bond or other type of fixed income investment that will be held to maturity. Management fees or ongoing guidance is an unnecessary expense that will eat into a good portion of the yield. A broker can provide advice and find what you need for a one-time commission payment.
  2. You have a small account and are uncomfortable or uninterested in making investment decisions on your own. Commission charges on a small portfolio are likely to be far less costly than a flat or hourly fee.
  3. You make infrequent transactions but would like occasional advice/collaboration. Again, a commission payment can be far less costly than a fee.
  4. You found someone you want to work with but he/she is an old school broker. There are still a lot of these out there. Honest, smart, experienced people that are paid by commission rather than a fee.

Let’s talk about #4 for a minute. A form of compensation can’t make a dishonest person honest. It can’t make an incompetent person competent. A compensation structure cannot ensure performance. If you fear that your advisor would be unsuitable for you were it not for a fee-only arrangement, you are with the wrong advisor.

Having said all that, my preference and, more importantly, the preference of many of my clients is to work on a fee-only basis. It’s an effective way to demonstrate that our interests are aligned and removes a potential source of suspicion or conflict. It’s a good arrangement for everyone involved. However, there are other clients that, for a variety of reasons, remain in a traditional brokerage account. This is fine too. The services I provide are not influenced by the compensation structure.

Investors should be wary of putting the cart before the horse. Find the right person first, then decide on the best way to pay for the service. In the end, the method of payment is not nearly as important as the cost and value of the payment.


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Disclaimer: Past performance is not indicative of future returns. Information displayed is taken from sources believed to be reliable but cannot be guaranteed. All indices are unmanaged and investors cannot invest directly into an index. Ideas and opinions expressed in this article are the sole responsibility of Patrick Crook/PLC Asset Management and do not reflect any stated opinions of Commonwealth Financial Network, National Financial Services LLC or any other person or entity.

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About Patrick Crook

Pat Crook is a financial advisor in Corvallis, Oregon with over twenty years of experience. He has developed a specialized form of investment portfolio management designed to address the risk concerns of those in or near retirement as well as organizations like charitable endowments and foundations. To learn more or set an appointment, he can be reached at 541.753.1808.