Background: The fee-only advisor is a type of investment professional who charges a flat hourly rate (or “a la carte” rate) for his/her services and/or a percent of assets under management, instead of taking compensation from commissions on investment transactions or the sale of investment products. A common misperception is that financial advisors provide their services for free. Most investors give little thought to the hidden costs they pay when an advisor recommends stocks, or other financial products such as annuities, and later receives a commission when investors buy in, or when an expert mutual fund manager picks stocks for a fund that charges significant management fees or front/back-end commissions. The primary benefit of a fee-only advisor is that he/ she can provide objective advice without being swayed by any personal benefits that may come with giving proprietary or certain recommendations.
Fees VS. Commissions
On the surface, commissions appear to be less costly to an investor. However, closer examination reveals a different story. Let’s assume you invest $100,000 in a mutual fund with a 5.75% front-end commission. You will immediately have $5,750 deducted from your account on the first day. If instead, you paid 1% of the value of the account each year for seven years then you would end up paying $7,000 in fees—not counting the fees from the account increasing in value. As the value of the account goes up, so does the amount paid in management fees. On the other hand, the up-front commission was only based on the initial investment. Why would I say that it is more expensive to pay a commission?