A:

The difference between a fee-based adviser and a commission-based adviser is that the former collects a flat fee for investment advice or a percentage of assets under management, while the latter receives payment upon opening an account for a client or on the sale of a financial product by the company offering that financial product.

Income for fee-based advisers is earned largely by fees paid by a client, although a small percentage of it can be earned through other commission sources such as by selling the products of brokerage firms, mutual fund companies or insurance companies. Because of these additional sources of income, fee-based advisers need to be transparent in their communication of a client's account costs. While a fee-based adviser can make commission off of the sale of investment products, the client makes the ultimate decision as to what types of investment products he wants to purchase.

Fee-based advisers follow the suitability rule for their clients, meaning they cannot sell their client an investment product that does not suit his needs and objectives. They also have a fiduciary duty to their clients over any duty to a broker, dealer or other institution.

A commission-based adviser's income is earned entirely on the products he sells or the accounts he opens. Products for commission-based advisers include financial instruments such as insurance packages and mutual funds. For a commission-based adviser, the more transactions he completes or the more accounts he opens, the more he gets paid. Commission-based advisers must follow the suitability rule for their clients. They do not have a duty to their clients; instead they have a duty to their employing brokers or dealers. Further, they do not have to disclose conflicts of interest.

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