A fee-based investment is a financial product or service offered by a bank or financial company for which the advisor is compensated with a fee plus commission. A fee-based pricing structure is one of several a financial professional may use.
Learn more about fee-based investments, how they work, and what it means for you.
Definition and Examples of Fee-Based Investment
A fee-based investment refers to financial products or services in which the financial professional offering it is compensated with a fee plus commission. The professional selling the product or service is called a “fee-based advisor” and you typically find them through a bank, insurance company, mutual fund company, or some other financial institution. Fee-based investments can include stocks, mutual funds, insurance, and more.
- Alternate name: Fee and commission
Let’s say you’re discussing fees with an investment advisor for managing your investments. The advisor explains they charge an annual fee based on a percentage of the total value of the assets in your account. Additionally, each trade you or the advisor executes in your account would be subject to a commission fee (1% of the trade value). Since the advisor charges an annual percentage-based fee plus a commission (1%) for each trade executed, you would be making a fee-based investment.
How Does a Fee-Based Investment Work?
Chris Gure, an investment consultant at Fortress Financial Partners, told The Balance in an email that fee-based investments are commonly sought after life events such as “graduating from residency, starting a new job, buying a home, getting married, or having a baby.” When working with a fee-based financial advisor, you can get advice on various topics, such as retirement or taxes.
The fee you pay can be a flat rate, hourly rate, or based on a percentage of the market value of assets you hold. When the advisor’s fees are based on the percentage of the value of your account, the advisor has an incentive to grow your assets. The larger the volume and value of your assets, the more the advisor can earn.
Fee-based financial advisors can receive sales commissions on certain financial products. This presents a conflict of interest—there is a motive to push you to certain products that may not best align with your best interest.
“If you are shopping for a disability insurance policy and the logo on your advisor's card is the same logo as the cover page of your insurance, did you really get the best deal?” Gure said. “The same goes for investment recommendations. If the name of your advisor's firm is the same name as the mutual fund, what advice did you really get?”
Gure shared an example of how it works when purchasing fee-based investments from a fee-based financial advisor.
“The client would collect all of their financial records and give them to the advisor to review and recommend how to improve their situation,” he said. “For fee-based financial advisors, this can be done for a fixed amount, an hourly rate, or a percentage of assets. Some advisors are known to give these plans for ‘free’ but the incentive to the advisor is the sale of a commissioned product, usually in the form of some kind of permanent life insurance.”
Alternatives to a Fee-Based Investment
Whereas fee-based investments earn an advisor a commission, fee-only advisors are compensated exclusively by their clients through fixed, hourly, flat-rate, percentage-based, or performance-based fees. A fee-only advisor eliminates the risk of an advisor selling you commission-based products that don’t align with your best interests. Performance- and percentage-based fees, especially, incentivize the financial advisor to grow your wealth. The more you make, the more they make.
The fee-only compensation model provides transparency and objectivity. This allows fee-only advisors to better adhere to the fiduciary standard, which legally requires them to put your interests before their own.
What It Means for Individual Investors
The potential risks that commission-based fees present are worth noting. The possibility of a conflict of interest, however, does not automatically undermine the soundness of the consultant’s advice. When meeting a financial advisor for the first time, consider asking outright how their conflicts of interest might affect you and what they can do to address it.
How To Get a Fee-Based Investment
When seeking a financial advisor for fee-based investments, consider asking for referrals from your family, friends, and colleagues. Just be sure your financial goals and values align with theirs. You can ask your tax specialist or attorney for recommendations, too.
Keep in mind that some financial firms have net worth requirements. Others may work with specific groups, such as small businesses or nonprofit organizations. You may need to shop around before settling on a fee-based advisor suitable for your needs.
- A fee-based investment refers to when a financial advisor is compensated by a base fee plus commission.
- Fee-based investments are available through financial consultants at a bank, investment company, or other financial institution.
- Fee-based investments can be related to investing, insurance, and more.
- The commission aspect of the fee-based compensation model presents a potential conflict of interest for investors.
- Fee-based advisors may charge a flat fee, hourly rate, or a percentage of the market value of assets being managed, but they do not earn a commission.