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Financial Advisor Question – Fee-Only vs. Fee-Based

 

Q: Is there a greater incentive for brokers to buy ETFs versus individual stocks for a client. I pay a flat 1% annual commission to our broker but he is constantly buying/selling many ETFs in the portfolio.

A: Thanks for your email and for listening to the show.

To answer your question, directly, likely NO. However, this is something that you should be able to ask and get a direct answer. Typically, if an advisor is getting commissions, they will get similar, if not the exact same, commissions on individual stocks and ETFs. You should ask your advisor if he is fee-based or fee-only. Typically, if your advisor is absolutely “fee-only” as constituted by NAPFA, then he/she is not incentivized or compensated in any other than by that 1% fee you mentioned. However, if he/she is fee-based, that means that the “base” of their pay is your fee, but they may receive compensation in other forms (including commissions) as well.

We believe in advisors who are fee-only because there is no smoke and mirrors. You see directly the fee and charges your pay and there is not gray area. You should ask your advisor exactly how they are paid. They are obligated to tell you.


 

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