Fee-Only, Fee-Based or Commission: How Advisors Are Paid

The three models

Compensation terminology in this industry is used loosely, and the same word can mean different things at different firms. These are the three arrangements most households will encounter.

These are general industry descriptions, not regulatory classifications. Actual compensation, conflicts and professional obligations depend on the firm, its personnel and the services provided. "Fee-based" is a marketing description rather than a separate registration category.

A firm can also sit in more than one column at once, which is where most of the confusion comes from. A household may pay an investment advisory fee while an affiliated insurance agency separately earns a commission on an insurance or annuity transaction. Such arrangements can be permissible when material conflicts are fully and fairly disclosed, applicable standards of conduct are satisfied, and recommendations are made in the client's best interest.

Every model has a conflict

The common framing treats one model as clean and the others as compromised. That is not how regulators look at it, and it is not a useful way for a household to think about it either. Each arrangement creates its own incentive, and the honest question is whether the incentive is disclosed and managed.

• Fee-only on a percentage of assets. An asset-based advisory fee may create a financial incentive to retain assets under management rather than recommend actions that reduce those assets, such as paying off debt, purchasing an annuity or making a substantial gift. Advisers must address applicable conflicts while making recommendations consistent with their fiduciary obligations.
• Fee-only on a flat or hourly basis. Removes the asset-size incentive, and creates a different one around the scope and frequency of work.
• Fee-based. Carries the advisory-fee incentives above, and adds an incentive associated with products that pay commissions. This is the arrangement that most needs clear disclosure, which is why it gets stated plainly below.
• Commission. Compensation is tied to transactions, which creates an incentive toward transactions and toward products that pay more. A commission-based arrangement may involve fewer direct ongoing advisory fees, but product expenses, embedded compensation, surrender charges and other costs should be considered when comparing total costs.

None of these makes a firm unsuitable. Conflicts of interest can exist under any compensation model. Financial professionals must identify and address applicable conflicts, provide required disclosures, and meet the standard of conduct governing the services they provide, and certain conflicts may require mitigation or elimination.

Payment is not the same as duty

Compensation and standard of care are separate questions that get collapsed together constantly, including in a lot of advertising.

Investment advisers are subject to fiduciary obligations when providing investment advisory services, including duties of care and loyalty. Broker-dealers and their associated persons are subject to Regulation Best Interest when making covered recommendations to retail customers. Although both frameworks address investor interests and conflicts of interest, they differ in scope, application and specific requirements. Insurance and annuity placement sits under state insurance regulation instead.

So a fee-based adviser is still subject to its fiduciary obligations on the advisory services it provides. And a fee-only firm is not thereby held to a higher standard on services that fall outside advisory activity. Fiduciary or broker covers how the two frameworks differ and what applies where.

How to verify it yourself

You do not have to take any firm's word for this, including ours. The disclosures are public.

• Form ADV Part 2A. Item 5 describes fees and compensation. Item 10 describes other financial industry affiliations. Item 14 covers compensation from third parties. Read those three before the marketing material.
• The SEC's Investment Adviser Public Disclosure database. Search the firm and read the filing rather than a summary of it.
• FINRA BrokerCheck, where applicable. Not every adviser or adviser representative holds a broker-dealer registration, but where one does, this is where that history sits.
• Form CRS, where it applies. A standardized relationship summary required for SEC-registered investment advisers and registered broker-dealers serving retail investors. State-registered investment advisers may have different disclosure requirements, so review the documents applicable to the particular firm.
• State insurance licensing records. Where an affiliated agency places insurance or annuities, its licensing is a matter of public record. Verifying insurance and annuity licenses covers how.

If what a firm tells you and what its ADV says do not line up, that gap is the thing worth asking about.

What to ask, and what a good answer sounds like

Four questions get to the bottom of this faster than any label.

• How are you paid for each service you provide? A good answer itemizes by service rather than giving one headline figure.
• Does anyone other than me pay you anything in connection with my account? A good answer is a plain yes or no, followed by the detail if yes.
• Do you or an affiliate earn commissions on anything you might recommend to me? A good answer names the affiliate and the products.
• What would my total cost be in the first year, in dollars? A good answer is a number, or an explanation of exactly what the number depends on.

Ask for the answers in writing. Not because anyone is expected to be evasive, but because a written answer is one you can hold against the ADV and against next year's invoice. Questions to ask before hiring a retirement income planner covers the rest of the interview.

How Avinci is paid

Avinci Wealth Management is a Registered Investment Adviser registered in California, Arizona, Illinois, Texas, and Nevada, firm CRD #327780, headquartered at 23929 Valencia Blvd, Suite 404 in Santa Clarita, with additional offices in Beverly Hills and Woodland Hills. When providing investment advisory services, Avinci Wealth Management is subject to its fiduciary obligations under applicable investment adviser law.

Avinci is fee-based, not fee-only. The firm receives advisory fees from clients for investment advisory services. Separately, insurance and annuity products may be offered through our affiliated insurance agency, Lucas Insurance Services, which may receive commissions from issuing insurance companies on the products it places.

That arrangement creates a conflict of interest: the affiliate earns more when an insurance or annuity product is placed than when one is not. It is disclosed in our Form ADV, it is stated in the footer of every page on this site, and it is the reason we describe the firm as fee-based rather than using the fee-only label, which would not be accurate.

Under the Retirement Blueprint, insurance is examined as one of five disciplines alongside investments, tax, income and estate coordination, and a recommendation to place a product is made in that context rather than on its own. Founder Lindahl Lucas is involved in overseeing the development of Retirement Blueprint planning. Clients receive Form ADV Part 2A before any advisory engagement begins, and any insurance placement is discussed separately with the affiliate relationship stated.