We all agree that advisors should be compensated for their efforts on behalf of their clients. The method of advisor compensation, its disclosure to the client, and whether it serves the client’s best interest are the factors that should be considered by any consumer prior to entering into an advisor-client relationship.

It is important for a potential client to understand the different ways advisors, and their firms are compensated and how that impacts the clients’ investment returns.

Generally financial advisors are paid either by charging fees or earning commissions.

Commission-Only Advisors earn their income by selling financial products such as insurance or mutual funds, or may also earn a fee for trades that they execute.

Fee-Only Advisors earn their income by charging fees. Some common methods include an hourly rate, an annual or retainer fee or as a percentage of investments under management.

Fee-Based Advisors earn their income using a combination of fees and commissions.