Key Messages:

• Fee-only, fee-based and commission-based describe compensation. They provide information about a financial relationship, but they do not establish whether an advisor is trustworthy, experienced or appropriate for a particular financial situation.

• Consumers can investigate much of what contributes to trust: compensation, conflicts, dollar costs, fiduciary capacity, regulatory history, services and relevant experience.

• Percentages become easier to evaluate when converted into dollars. A 1% annual AUM fee equals $10,000 on $1 million and $20,000 on $2 million.

• Compensation can create incentives. Consumers can identify those incentives without assuming that an incentive automatically produces inappropriate advice.

• Datalign has its own financial interest in advisor introductions. Participating advisors compensate Datalign for introductions; consumers do not pay to use the platform.

Two people can prefer the same compensation model and need different advisors because retirement, concentrated stock, inheritance, taxes, an existing advisor relationship and other circumstances require different expertise. How a financial advisor gets paid can tell you something about the financial relationship you are considering. It can identify who pays the advisor, whether certain products generate compensation and where conflicts of interest may arise.

It cannot tell you whether you should trust the advisor.

Trust requires more information you can examine: what the advisor will charge you, what services you will receive, whether a recommendation changes the advisor’s compensation, when the advisor acts as a fiduciary, the advisor’s regulatory history and whether the advisor has experience with the financial decisions you need help making.

Datalign has a financial interest in this process, too. Consumers use Datalign without paying us, while participating financial advisors pay us for introductions to prospective clients. ⁠Our disclosures explain that arrangement. 

“Fee-only,” “fee-based” and “commission-based” provide one part of that information.

What Is the Difference Between Fee-Only, Fee-Based and Commission-Based Financial Advisors?

For CFP® professionals, ⁠CFP Board defines “fee-only” through restrictions on sales-related compensation. The CFP® professional and the professional’s firm cannot receive sales-related compensation, and CFP Board places additional restrictions on compensation received by related parties in connection with services provided to clients.

CFP Board treats “fee-based” as equivalent to “fee and commission.” A CFP® professional using that description must make clear that the professional or firm earns both fees and commissions or otherwise state that the arrangement is not fee-only. ⁠CFP Board’s Standards of Conduct contain the complete requirements.

Commission-based financial professionals can receive compensation associated with financial products clients purchase. Depending on the professional and product, that can include insurance, annuities and certain investments.

Two advisors can use the same compensation model and offer substantially different relationships.

Suppose one fee-only advisor charges 1% of assets under management and another charges $5,000 per year for financial planning. With $2 million under management, the first arrangement would cost $20,000 annually if the 1% rate applied to the full balance. The second would cost $5,000 annually..

The compensation label is the same. The price and potentially the service are not.

Can You Trust a Fee-Only Financial Advisor?

Fee-only compensation removes certain forms of sales-related compensation. It does not establish an advisor’s competence, experience, regulatory history or suitability for your financial situation.

Those are facts you can investigate.

Someone approaching retirement with a 401(k), IRA and taxable account might ask how often an advisor builds retirement-income plans and coordinates withdrawals across different account types. Someone with $750,000 in employer stock might ask about experience with concentrated positions and equity compensation. Both people could prefer fee-only advisors while looking for different expertise.

You can also verify an advisor’s regulatory background rather than relying exclusively on what the advisor tells you. The SEC’s ⁠Investment Adviser Public Disclosure database provides information about investment adviser firms and representatives, including Form ADV filings. FINRA’s ⁠BrokerCheck provides registration and background information about brokerage firms and registered financial professionals.

Does Fee-Only Mean Fiduciary?

No. Fee-only describes compensation. Fiduciary describes a legal obligation.

The ⁠SEC’s interpretation of investment advisers’ fiduciary duty states that an investment adviser owes a fiduciary duty to its clients under the Investment Advisers Act and that the duty applies to the entire adviser-client relationship.

Broker-dealers making covered recommendations to retail customers operate under ⁠Regulation Best Interest. Reg BI requires a broker-dealer making a covered recommendation to act in the retail customer’s best interest and not place its own interests ahead of the customer’s interests.

Some financial professionals operate in more than one capacity. A person can therefore give you an accurate answer to “Are you a fiduciary?” while leaving another question unanswered: When do you act as a fiduciary for me, and does that obligation apply to every service you provide?

The SEC requires registered firms to provide retail investors with Form CRS, a relationship summary covering areas including services, fees, conflicts and standards of conduct. Datalign files ⁠its own Form CRS with the SEC.

How Can Compensation and Commissions Affect the Relationship??

A financial professional’s compensation and legal obligations depend on the professional’s registration, capacity and activity. Some professionals operate in both investment-adviser and broker-dealer capacities.

Suppose you pay a professional for financial planning and that person recommends a financial product that can generate additional compensation. Five questions can clarify the arrangement:

1. What am I paying you for the planning work?

2. Will you or your firm receive additional compensation if I follow this recommendation?

3. How much?

4. Would another product compensate you differently?

5. In what capacity are you acting when you make this recommendation?

The ⁠SEC’s Regulation Best Interest guidance addresses compensation and other conflicts associated with broker-dealer recommendations.

How Can Financial Advisor Compensation Create a Conflict of Interest?

Consider an advisor who charges 1% of assets under management.

A $1 million portfolio would generate a $10,000 annual advisory fee if the 1% rate applied to the entire balance. Suppose the client is considering withdrawing $200,000 to pay off a mortgage. The assets under management would fall to $800,000, reducing the annual fee to $8,000 under the same assumptions.

The client’s decision would therefore reduce the advisor’s annual revenue by $2,000.

That calculation does not establish what the advisor will recommend. It identifies a financial interest affected by the decision. The client can ask how the advisor evaluates decisions that reduce assets under management.

Commission arrangements create different financial interests. If a professional receives compensation when you buy a particular financial product, ask how much the professional and firm receive and whether comparable alternatives generate different compensation.

The SEC addresses compensation conflicts directly in ⁠Regulation Best Interest, including conflicts associated with compensation arrangements and third-party payments.

Is a Fee-Only Financial Advisor Cheaper?

Not necessarily. “Fee-only” describes a compensation method rather than a price.

Consider two fee-only advisors. One charges 1% of assets under management. The other charges $5,000 per year for financial planning.

For someone with $500,000, both arrangements would cost $5,000 under those assumptions. At $2 million, the 1% fee would equal $20,000 while the flat fee would remain $5,000.

A $20,000 relationship might include investment management, retirement-income planning and ongoing meetings. The $5,000 engagement might provide a defined financial plan without portfolio management. Or the services could be much more similar.

Ask each advisor for two numbers: the amount you would pay during your first year, in dollars, and the services included for that amount.

What Does a 1% Financial Advisor Fee Actually Cost?

A percentage becomes easier to evaluate when you convert it into dollars.

An advisory firm may use tiered rates, minimum fees or breakpoints, so its actual calculation may differ from this table.

There can also be costs beyond the advisor’s stated fee. Depending on the investments and services involved, those can include fund expenses, product costs and other charges.

The SEC’s relationship-summary framework specifically directs consumers toward this issue. ⁠Datalign’s Form CRS, for example, includes a conversation starter asking a financial professional to explain how fees and costs would affect a $10,000 investment.

For an actual advisor search, use your own numbers. If you expect an advisor to manage $1.5 million, ask the firm to calculate what you would pay during the first year and identify any costs that would sit outside that figure.

Should I Choose a Financial Advisor Based on Fees?

Fees tell you about the economics of the relationship. They can also expose incentives you may want to discuss before hiring someone.

Suppose one advisor charges 0.75% and another charges 1%. On $1 million, the difference is $2,500 per year if each percentage applies to the entire balance. Ask what you receive for each fee, whether other expenses apply and whether either advisor or firm receives compensation from another source.

Then examine the service.

An advisor who regularly builds retirement-income plans offers different expertise from someone whose practice centers on equity compensation or business owners. An advisor who manages investments and provides ongoing planning offers a different engagement from someone producing a one-time financial plan.

A fee tells you what you pay. The advisor’s services and experience tell you what you are paying for.

What If You’re Looking for an Advisor Because You’re About to Retire?

Suppose you are five years from retirement with $1.4 million divided among a 401(k), rollover IRA and taxable brokerage account.

You may be deciding when to claim Social Security, when to retire, how much you can spend and how withdrawals from different accounts will affect your taxes.

Ask how the advisor builds retirement-income plans. Ask whether the quoted fee includes that work. Ask how the advisor approaches decisions involving different account types and taxes. Ask how often the plan gets revisited after retirement.

The compensation model describes the business relationship. The answers to those questions tell you more about the advisor’s experience with your problem.

What If Much of Your Money Is in Company Stock?

Suppose you have $750,000 in employer stock after years of equity compensation.

Your decisions may involve diversification, capital gains, option exercises, vesting schedules and the amount of your financial life tied to one company.

A fee-only advisor can have extensive experience with concentrated positions or almost none. Ask how frequently the advisor works with employer stock and equity compensation and what that work involves.

The same principle applies to an inheritance, the sale of a business, divorce or dissatisfaction with an existing advisor. The event that prompted the search can tell you what experience to investigate.

What Should I Ask a Financial Advisor Before I Trust Them With My Money?

You do not have to infer someone’s motives to investigate a financial relationship. Much of the relevant information can be requested or independently verified.

Ask:

1. How do you and your firm get paid for working with me?

2. What would I pay during my first year, in dollars?

3. What services are included in that amount?

4. Does anyone besides me compensate you or your firm?

5. Can a recommendation change how much you or your firm earns?

6. When do you act as a fiduciary for me?

7. Do you provide any services to me in another capacity?

8. Where can I review your regulatory filings and disciplinary history?

9. How often do you work with people facing the financial decisions I need help with?

10. Who will actually work on my account?

Then verify the answers you can.

If an advisor says the fee is 1%, calculate it using the amount you expect the advisor to manage. On $750,000, 1% equals $7,500 per year if the rate applies to the full balance.

If an advisor says the firm specializes in retirement, ask what retirement planning it actually provides and who performs that work.

If the advisor describes a regulatory status or disciplinary history, check the applicable public record.

Datalign’s ⁠Form CRS includes SEC-prescribed conversation starters covering fees, conflicts, disciplinary history and the capacity in which a financial professional acts. These are practical questions because they produce information a consumer can evaluate.

How Can I Check a Financial Advisor’s Background?

The SEC’s ⁠Investment Adviser Public Disclosure (IAPD) database provides information about investment adviser firms and representatives. That includes Form ADV filings containing information about an advisory firm’s business, fees, conflicts and disciplinary history.

FINRA’s ⁠BrokerCheck provides registration and background information about brokerage firms and registered financial professionals.

The SEC’s ⁠Investor.gov “Ask and Check” guide explains how consumers can use these systems when researching financial professionals.

Datalign encourages consumers to conduct their own due diligence on advisors they meet through our platform. ⁠Our disclosures explain the limits of Datalign’s screening and the consumer’s responsibility for interviewing and evaluating an advisor before deciding whether to hire one.

Read the applicable disclosures before signing an advisory agreement. If a written disclosure differs from what you understood during a conversation, ask the advisor to explain the difference.

The Aligned Perspective: What Can You Actually Verify Before Trusting a Financial Advisor?

More than 100,000 people have come to Datalign looking for financial help, and thousands of financial advisors participate in our network. That puts us in the middle of a decision people make every day: whom do I trust to help me with my money?

Datalign uses information consumers provide about their financial circumstances, what they want help with and their preferences for the advisory relationship to identify a participating financial advisor for a single introduction. Our Form CRS describes our service, and our disclosures explain how Datalign gets paid..

Those disclosures apply the same principle we recommend when evaluating an advisor: find out who has a financial interest in the relationship and what that interest is.

Consumers do not pay to use Datalign. Participating advisors compensate Datalign for introductions. Datalign does not manage consumer assets or provide investment recommendations. We help consumers find participating financial advisors based on the information they provide about themselves and the financial help they are looking for.