Glossary
What is the difference between fee-based and commission?
A fee-based advisor is paid a percentage of the assets they manage, so their revenue rises and falls with your balance. A commission-based advisor is paid by the product provider when you buy something. The difference determines whose interest the advice is aligned with by default.
Neither model is inherently dishonest, but the incentives differ and it is worth knowing which one is operating. Commission compensation rewards transactions; asset-based fees reward growing and keeping the balance.
Asset-based fees are not free of conflict either. An advisor paid on assets under management has a reason to discourage paying off a mortgage or buying an annuity, since both reduce what they manage. A good advisor names that conflict rather than pretending it does not exist.
The question worth asking anyone is simply: how are you paid, by whom, and what would you earn if I did nothing at all?
Where the money comes from
| Fee-based | Commission | |
|---|---|---|
| Paid by | You, as a percentage of assets | The product provider |
| Rises when | Your balance grows | You buy something |
| Built-in conflict | Discourages reducing managed assets | Rewards transactions |
| Ongoing service | Assumed in the fee | Varies by product |
Related terms
Safe withdrawal rate
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