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  • Conner Brady

Understanding the Difference between Commission-Based, Hybrid, and Fee-Only

Updated: Feb 10

When seeking professional financial guidance, it's essential to understand the different compensation models adopted by financial advisors. These models can significantly impact the advice and services you receive. In this blog post, we'll explore the key distinctions between commission-based, fee-based, and fee-only financial planners, helping you make an informed decision about which approach best aligns with your financial goals and interests.


Commission-Based Professional

Commission-based professionals earn their income by selling financial products and services. This compensation structure means that the professional receives a commission or a percentage of the investment of the products they recommend or sell to their clients. These products may include mutual funds, insurance policies, annuities, and other investment vehicles. While commission-based professionals may offer their services at no upfront cost to clients, how they get paid can be confusing or obscure for some clients, as the professional is being paid out by the product company, not directly from the client. If asked, financial professionals will explain how their commission is paid from products.


Pros:

No upfront fees: Clients may not have to pay anything directly to the representative initially.

Access to a range of products: Commission-based representatives may offer a variety of financial products and services.


Cons:

Lack of transparency: Clients may not be fully aware of the commissions earned by the professional, potentially leading to a lack of clarity in the overall cost of the advice.


Hybrid Financial advisor:

Hybrid, Fee-based financial advisor charge clients both fees for their advice and services, as well as earning commissions from product sales. This hybrid approach combines elements of both commission-based and fee-only compensation models. Hybrid planners may charge an upfront fee or an ongoing retainer for financial planning services, while also receiving commissions from certain financial products they recommend or sell. Just like with commission only models, how they get paid can be confusing or obscure for some clients, as the professional is being paid out by the product company, as well as from their clients.


Pros:

Broader range of services: Fee-based planners may offer a wide array of financial services beyond just investment advice.

Flexibility: Clients can choose to pay fees upfront or opt for an ongoing retainer arrangement, depending on their preferences.

One time plan: Some Hybrid planners will make a financial plan for a one-time fee, which can be helpful for those who want a second opinion or are DIYers. However, planners want to help their clients stay up to date on their plan, and may refuse a one-time plan, preferring to stay engaged in their clients’ lives.


Cons:

Transparency concerns: Clients should be vigilant in understanding how the professional’s commissions may influence their recommendations.

High engagement cost: A Hybrid approach may not be suitable for clients looking for a low engagement service, as it could be more expensive for such clients.


Fee-Only Financial Planner:

Fee-only financial planners are compensated solely through fees paid directly by their clients. They do not earn commissions from selling financial products. This model generally has the simplest compensation structure, which can make it easier for potential clients to understand. Fee-only planners focus solely on providing objective advice and creating financial strategies tailored to their clients' best interests.


Pros:

Objective advice: Fee-only planners are not influenced by commissions, enabling them to recommend products and strategies solely based on their clients' needs.

Simpler compensation model: A Fee-only approach generally has a straightforward compensation model which can make it easier to understand.

Potential for one-time plans: Many planners will make a financial plan for a client for a one-time fee, which can be helpful for those who want a second opinion or are DIYers. Some planners may refuse a one-time plan, preferring to stay engaged in their clients’ lives.


Cons:

Upfront Costs: Clients will need to pay fees directly to the planner for their services, which can vary based on the scope and complexity of the financial plan. This could include an upfront payment for the initial plan, with some planners asking for a retainer fee to keep client plans up to date.

High engagement cost: The Fee-only planning model tends to be a high engagement model, which can lead to higher costs for clients looking for low engagement. This can be mitigated with a one-time plan.



As you embark on your financial planning journey, it's vital to understand the compensation models of the professionals you engage. Commission-based, Hybrid, and Fee-Only all offer different approaches to serving clients.

No two advisors are alike. Some Fee-Only planners will try to obscure fees, and some commission-based professionals are very clear how they are paid. All Advisors have a duty to do what is best for their clients Ultimately, your decision to work with a financial professional should be based on if you like them and can trust them.

If you have questions or would like to learn more, contact us or grab a time in our calendar here!


These are the opinions of Brady Planning and not necessarily those of Cambridge Investment Research. This is for informational purposes only and should not be construed or acted upon as individualized investment advice.

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