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Three Types of Financial Advisors

There are three types of financial advisors in the investment industry.  They all may use different titles but all fall under one of three categories.
1) Commission-based
2) Fee-Based, or
3) Independent, fee-only, Registered Investment Advisors.

Commissioned and fee-based financial advisors sell products such as annuities (see our report 5 Truth’s To Know Before Buying An Annuity report) and actively managed mutual funds (see our report 9 Investor Mistakes and How To Avoid Them report). They are typically focused on the numbers. They repeatedly use the same process to sell a specific product. They use the title “financial planner” as a way to hide what they really are, which is a “product salesman.” They are really just sales agents representing a company. This is really no different than going to a BMW dealership and asking a sales rep if he thinks BMWs are better than Mercedes Benz. Their philosophy is simple: make a sale and earn a commission. Some advisors might truly believe in the product they are selling; however, we have spoken with many commission–based advisors who have told us they would not sell certain products to their clients if they did not need the commissions to pay their bills.

These types of financial advisors regularly contend with sales quotas in order to keep their contracts or earn vacations to Hawaii, Grand Cayman Islands, Cabo San Lucas, etc. Commission-based products definitely create a big sales incentive for this type of advisor. This creates an inherent potential for conflicts of interest. You will always wonder if the plan is more for the benefit of the “advisor” or the peace of mind and well-being of you, the client.

A recent survey revealed that only 15 percent of this type of advisor is “very satisfied” at their firm, and another 20 percent planned to leave within two years.1  We believe, however, that most never actually leave because they are addicted to commissions. They cannot afford to break away from commissions and work on fees only. What generally happens with commission–based advisors is that they start to view their current clients as less valuable than new ones. When they have the choice between working with a new prospect (and in turn getting a new commission) or spending time with a current client (and getting nothing), it can be hard for them to put the attention into his/her current client.

That is why we prefer a independent, fee-only, Registered Investment Advisor. Clients are more valuable in subsequent years then they are the first year. An independent, fee-only advisor earns no commissions at all. They derive their income from client management fees like an attorney or a CPA. They don’t get any kickbacks for using any particular product or company.

A Registered Investment Advisor firm has a fiduciary duty (a legal requirement, just like attorneys) to act in the clients’s best interest regardless of the level of compensation the advisor may receive as a result of recommendations or actions. Someone who is “commission-based” does not have that same fiduciary obligation. Commission advisors have a suitability standard. That means they have no specified duty to act in a client’s best interest. Most commission-based advisors have specific ties to insurance/mutual fund companies.

A Registered Investment Advisor does not pitch product or security transactions with the idea that “this will be a win-win for both of us.” A Registered Investment Advisor puts the client’s best interest first and it is the only interest that matters.

Fee-Only, Registered Investment Advisors structure their business to earn income from fees instead of commissions. Their emphasis is on client education. They derive their income from management fees that are usually a percentage of the assets a client has invested with them. They have a direct interest in your long-term success because the better your account does, the better they do. They don’t need to make a new sale in order to pay their bills.

We invite you to request a free consultation.  Simply click here. [6/1/10]



The Introduction To Prosperous Investing — The First Appointment

Once you schedule your
Introduction To Prosperous Investing, we will send you a short first appointment questionnaire within 24 hours.  The first appointment questionnaire gives us a brief overview of your current situation, what your top concerns are, and will helps us better understand your investment experience.  To schedule your first appointment, simply call us at 801-545-0696 or click, Let’s Begin. 


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