Fee Only vs. Commission Based Services

Brokers and financial advisers are very important for anyone who wants to be successful in the investment industry. Their assistance will ensure investors success because of their knowledge in the industry and expert in handling different accounts.

The tips from financial advisers will ensure you success because they are able to consider different factors and even create a personalized strategy that will work for you. Most of the time, your broker will also be your financial adviser. This setting makes it even more convenient for investors to deal with brokers.

But you cannot just get a broker and/or financial advisor for free. There will always be fees especially in this industry. There are two types of payments in this industry and each of them has advantages and disadvantages.

Fee Only Services

The first payment option is the fee only services. You will be billed by the number of hours the financial advisers spent in analyzing your account and giving recommendations. Every time you meet with the financial adviser and their time spent in dedicating their efforts to your account, they will charge you. This setting is almost the same as legal counsels.

There are many advantages of fee only services which is why this is the more popular type of payment scheme. Investors will know how much they will be paying their advisers and nothing more. They could also provide an independent assessment of your portfolio and provide good recommendation.

Their recommendations will mostly be objective since they will not benefit from your movements. Churning is also prevented as brokers and financial advisers cannot earn from different transactions. Churning is an act of constantly moving your portfolio through buying and selling to increase their commission.

The disadvantage of this type of investment is the fact that each service is often billed a la carte. That means their services as an advisor is totally different from the services they provide as broker. You should check out the services included on the fees that you have to pay. Fortunately, there are no hidden fees but it could be a little bit costly if you are not aware of the services they offer.

Commission Based Services

There are brokers and advisers who work by commission. They could be independent brokers or brokers that represent large firms. Remember that most brokers that could be connected to large firms are only allowed to us their names in exchange for a commission. As a result, they are technically still independent brokers. They will not charge you per hour of services but they will earn a commission based on the movement of your portfolio.

The advantage of this type of payment scheme is that most services are covered by the commission. You will not be required to do anything at all except to monitor the movement of your portfolio. They could work for hours and hours to improve your portfolio and they will only earn through their performance.

But one of the most prevalent problems in hiring a commission based broker is churning. Some brokers, who see no movements, would buy and sell aggressively even though there are no movements as the prices of shares did not fall or improved.

Brokers are also paid as the portfolio moves but you do not earn anything but lose some because of churning. Another problem with this type of payment scheme is the objectivity of the financial adviser. They may sound sincere or an expert in this industry; bur they are only recommending stocks that will benefit them in someway.

Always think twice in selecting what type of payment scheme you would go. Each of them has an advantage but with certain disadvantages. Take your time as losing time is better than losing money not because you are losing in your shares but through exorbitant fees.