What is a 'Fee-Based Investment'

A fee-based investment refers to how a financial advisor is compensated, in particular, the ability to earn a commission by selling a product. This is opposed to a fee-only financial advisor, who cannot accept commissions and must adhere to a fiduciary standard at all times.

Breaking Down 'Fee-Based Investment'

The term "fee-based" is often used to describe a hybrid adviser or dually registered advisor, who can charge fees to certain clients as well as earn commissions by selling products to other clients. "Fee-based" is a term created by brokerages and the insurance industry in response to the success of the "fee-only" classification. Studies have found that consumers find this distinction confusing.

Fee-Based Investments and Clients

"Fee-only" arrangements are widely considered to be better for the client as there is no threat of a conflict of interest, but fee-based advisors may be better for some (usually less-wealthy) clients who might otherwise not be able to afford a fee-only advisor. Fee-based investments and advisors could have a greater incentive to sell a product that offers them the best commission rather than what is best for the client because they need only to meet the less stringent suitability standard. Fee-based advisors have a duty to disclose how they are being compensated because of the inherent moral hazard of the commission-based model.

Questions to Ask a Fee-Based Advisor

Would-be clients would be well-served by asking the following questions to be certain of exactly what to expect from a fee-based advisor:

  • What are you professional qualifications and what is your educational background as it relates to dispensing financial advice?
  • What is your expertise?
  • How are you paid? (fees, commissions or a combination of both)
  • Do you adhere to a fiduciary standard?
  • Why are you recommending this product to me? Why is it suitable to me?

Fee-Based Investments and Advisors

The appeal of offering fee-based investments has to do with the flexibility it offers financial advisors as well as the potential creation of sustainable revenue via recurring fees. It allows them to continue to serve clients who prefer to stick with the commission model — which often accounts for a significant share of an advisor's revenue — and keep using familiar, tried-and true products. This is especially true for advisors who may seek to drop their broker-dealer status to move to a standalone RIA model. In such a case they stand to miss out on significant trailing commissions. This consideration is particularly salient, as the ranks of hybrid advisors continue to grow.

RELATED TERMS
  1. Financial Adviser

    A financial adviser (or advisor) is a professional who provides ...
  2. Suitable (Suitability)

    A suitable investment meets a firm's, and often legal, criteria ...
  3. Federal Covered Advisor

    A federal covered advisor is a U.S.-based investment advisor ...
  4. Advisor Fee

    An advisor fee is a fee paid by investors for professional advisory ...
  5. Advisor Account

    An advisor account is an investment account where investment ...
  6. National Association of Personal ...

    The National Association of Personal Financial Advisors (NAPFA) ...
Related Articles
  1. Financial Advisor

    Is Fee-based or commission-based investment advisor better?

    Out of the many types of advisors, understand the difference between fee-based and commission-based Investment advisor. Find out which type fit best with your style of investment.
  2. Insights

    How Banks Are Turning Fees Into a Profit Machine

    Wall Street is using the fiduciary rule to phase out retirement commissions.
  3. Financial Advisor

    How Advisor Compensation Models Are Evolving

    Is there still a place in this world for commission-based advice in wealth management?
  4. Personal Finance

    Fee-Only Financial Advisors: What You Need to Know

    Are you considering hiring a fee-only financial advisor (vs. one who is compensated via commissions)? Read this first.
  5. Investing

    Wrap Accounts: A Gift Of Advice?

    Fee-based accounts were banned in 2007, but a on a practical level, this service remains the same for investors.
  6. Financial Advisor

    Broker Commissions Are Here To Stay

    With two developed nations adopting a firm anti-commission stance, questions have arisen over whether or not the United States should follow suit. Find out why such a development is unlikely.
  7. Financial Advisor

    Essential Questions for a Financial Advisor

    If you're a prospective financial advisor client (or an adviser), here are some questions you should ask ... and be prepared to answer.
  8. Financial Advisor

    How Does Your Financial Advisor Get Paid?

    Some questions to ask your financial advisor about the recommendations they make and how they get paid.
  9. Financial Advisor

    Why Clients Leave Their Advisors

    Clients fire financial advisors for many reasons. Here's a rundown on why they're likely to do so and how to avoid losing any from your roster.
  10. Tech

    The Coming Fiduciary Rule: Advisor, Client Impact

    The proposed DOL fiduciary standard has wide ranging implications for advisors and their clients. Here's an overview for advisors and their clients.
Hot Definitions
  1. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  2. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  3. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  4. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  5. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  6. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
Trading Center