Fee-Only vs. Commission
Our goal is always to provide objective and honest financial advice. We believe that conflicts of interest should be either minimized and disclosed, or completely taken out of the financial planning process. For this reason, we’ve adopted a fee-only service model within our firm. Here are a few differences between a Fee-only planning firm vs. a Commission based firm:
To be clear, the differences between fee-only and commission are vast. But overall, most clients are better served by a fee-only financial planner who is legally bound to operate with your best interests in mind.
Fee only planning firms disclose their fees and services to be provided up front, while commission based firms typically do not disclose the commission to be received on the sale. It is a common sales practice to offer “free” financial planning services that are contingent upon the purchase of a financial product such as life insurance. As is in life, nothing is ever free, the premiums you pay are the price of entrance. And the financial advice to be provided is usually skewed toward the sale of the product.
Fee-only planning firms have a fiduciary duty to act in the client’s best interest, while commission based firms are only held to a “suitability” standard of care. Essentially, if a fee only planning firm fails to meet their standard of fiduciary duty, the client has the right to seek legal damages. The burden of proof falls on the planning firm to show why recommendations were made. This is the complete opposite of the suitability standard of care. This standard is very subjective and typically the burden of proof will fall on the client to show that the sales agent didn’t act in the client’s best interest.
Fee-only planning firms do not have any allegiance to financial product companies, while commission based firms typically do. Most commission based firms are either captive or independent. Captive means that they are only available to sell products from one particular financial company, which very much limits choice. However, even if they are independent and can sell multiple products from multiple companies, most typically will try and sell the financial product with the highest commission.