Broker Check

Fee-Based or Fee-Only? Does it Matter?

| March 20, 2012
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The Dodd-Frank Wall Street Reform and Consumer Protection Act passed without requiring a universal fiduciary-duty rule which would require broker-dealers (Merrill Lynch, Morgan Stanley, UBS, Wells Fargo Advisors, etc.) to meet the investment adviser standard. The SEC now must grapple with this. Central to the heart of the debate is the question of sales commissions. The broker-dealers state it is possible to charge sales commissions and also give trustworthy advice. Other advisors and regulators in the industry believe that an advisor’s vision is cloudy once the investment choices include products that carry big sales commissions, and that clients pay a heavy cost for their investment choices when dealing with a broker-dealer. Sales commissions can be found across the product lineup for broker-dealers, and include load mutual funds, unit investment trusts, and most insurance products. When dealing with the issue of sales commissions involving investment advice, consider these questions:

  • Can a financial advisor recommend that a client invest in FUND XYZ (A shares) [which also includes the payment of a 5.75% sales commission to the financial advisor] and still say that he/she is looking out for the best interest of the client, i.e. acting as a fiduciary?
  • What if the financial advisor knows that the client can purchase those same shares of FUND XYZ (no load shares) without a 5.75% sales commission at a competitor firm, is the financial advisor still a fiduciary looking out for the best interests of his client?
  • Does not the charging of even adisclosed sales commission disqualify an advisor from being a financial advisory fiduciary if the sales commission alters the advice of the advisor?

The holy grail of sales commissions for many broker-dealer producers is the variable annuity. An upfront sales commission of 5% or more is common for a variable annuity recommendation from a broker-dealer advisor. See theSmartMoney primer why these expensive variable annuities do not make sense for most people, yet are more aggressively sold “than fake merchandise on the streets of New York City”.

The trend for broker-dealer advisors is to distance themselves in their marketing material from the entire sales commission debate by stating that they are “fee-based” advisors. The connotation is that they really do not charge sales commissions that much, but rather focus their business on fee related compensation, which is deemed by investors as a more equitable source of compensation than big one time sales commissions. Remember that a “fee-only” advisor, however, can never charge a sales commission and is likewise not compromised by the product lineup on what to recommend to the client.  

Do “Fee-based” advisors really avoid sales commission products?

Interestingly, the faster growing side of the broker-dealer world, the “independent” broker-dealers, has tried to separate themselves from their larger broker-dealer cousins such as Merrill Lynch and Morgan Stanley by using the word “independent” ad nauseam. With the increase of momentum of the anti-Wall Street movement, the further away from Wall Street you are as financial advisor the better. The investing public equates the words “Independent Firm” and “fee-based” as good, “Wall Street Firm” and “sales commissions” as bad. The reality however is quite different from the public marketing campaign. The fact is that even the independent broker-dealers rely on sales commissions for a large part of their revenue. In fact, in a recent June 2011 Financial Planning magazine cover article highlighting the top 50 independent firms, the four largest independent broker dealer’s breakdown of revenues is as follows:

2011 Rank


Total Revenue


Commission Revenue

% of Total


Fee Revenue

% of Total


Other Revenue

% of Total


LPL Financial












Ameriprise Financial Services












Raymond James Financial Services












Commonwealth Financial Network











As can be seen, even the large independent broker-dealers rely heavily on commission revenue for the largest part of their revenue stream. In fact, only 2 firms on the top 50 list of independent broker-dealers had more fee revenue than commission revenue: #4 Commonwealth Financial Network (51% fee revenue) and #11 Cambridge Investment Research (56% fee revenue). Therefore, 48 of the 50 largest independent broker-dealer firms still bring in more commission revenue than fee revenue! Where did all the fee-based advisors go? Someone is still selling the front-load investment products and those variable annuities.

The Fee-Only Advisor

By hiring a fee-only advisor, an investor can assure that their advisor will never give a conflicting commission product recommendation. Of course “fee-only” should not be the only criteria for choosing an advisor, but is certainly a good starting point. Experience, personality, education, service and ability should also be considerations when choosing a financial advisor. Fee-based is not fee-only. Even though both fee-only and fee-based financial advisors may have accounts they manage where they charge a percentage of the assets as a management fee, the investments placed inside the accounts can be very different. The fee-only advisor has a fiduciary responsibility to choose investments that are in your best interest. They typically use investment that have low internal expenses such as no load mutual funds, investments that have no 12b 1 fees (kick back money to advisors from the investment company), stocks and bonds. A fee-based financial advisor can receive fees paid by the client, and commissions paid to them by a brokerage firm, mutual fund company, or insurance company. A fee-only advisor cannot receive compensation from these sources and puts that in writing. The fee-only advisor is paid directly by the client and only by the client, and likewise the loyalty of the fee-only advisor is 100% with the client.

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