When choosing a financial advisor, an important factor to consider is how the advisor is compensated.  Even though all investment advisers should be fiduciaries and that all broker-dealers should act in the best interests of clients, compensation model can create different financial incentives and potential conflicts of interest. Understanding how an advisor is paid can help you evaluate the services and recommendations you will receive. Financial advisors are typically compensated in one of three ways: commission-based, fee-based, and fee-only.

Commission-based advisors receive compensation connected to the specific financial products they sell. Because compensation may vary depending on the product or transaction, commission arrangements can create incentives that investors should understand when evaluating a recommendation.

Fee-based advisors may receive both fees paid directly by clients and commissions or other compensation related to financial products or transactions. Because these advisors may receive compensation from multiple sources, clients should understand how the advisor is compensated and the conflicts that may arise from those arrangements.

Commission-based compensation is not the only form of compensation that may create conflicts of interest. Other arrangements, such as revenue sharing, soft-dollar benefits, and kickbacks, may also create financial incentives. For example, some financial firms may receive payments from investment product companies in connection with platform access, distribution, or other services. Investors should understand whether a financial professional or firm receives third-party compensation related to the investments or services it recommends.

Fee-only financial advisors are compensated directly by their clients. They don’t receive commisions or other compensation from product companies. Fees may be based on assets under management, or other agreed-upon fee structure.

The National Association of Personal Financial Advisors (NAPFA) is a professional organization whose members provide financial planning services on a fee-only basis. NAPFA’s position is that the Fee-Only method of compensation is the most transparent and objective method available. This model minimizes conflicts and ensures that your financial advisor acts as a fiduciary. For those interested in learning more about fee-only financial planning, visit NAPFA.org.

At Zhang Financial, we believe informed clients are better positioned to evaluate their financial options and the professionals who advise them. For additional educational content and financial planning insights, visit ZhangFinancial.com.