Financial Planning Basics: Commission Based Planner versus Fee Based Planner

Jul 11, 2023


One of the most common questions we get as financial planners is how do your fees work? It might seem straightforward but in the world of financial planning, it isn’t always clear. Here at Peninsula Wealth, we are focused on only your needs so our services are fee based but that isn’t the case for all financial firms.

In general, there are two approaches to fees and it’s important to understand where your financial planner stands:

  • Commission-Based or Fee-Only: These financial planners get paid by you directly, often through an asset-based fee on the overall portfolio. Essentially, they make money when you make money.
  • Fee-Based: These financial planners may also earn commissions or fees for the products they sell.

Fee-only financial planners, like Peninsula Wealth, are paid directly by clients and are obligated to act in a fiduciary capacity, meaning they put their clients’ needs and interests first, rather than focusing on specific products that earn them extra money. A fee-based financial planner can be more focused on the products they know and have a relationship with that may also be suitable for their clients.

How does a fee-only financial planner work?

Fee-only financial planners can be compensated in a number of ways but are always paid directly by the client. This can come in the form of a flat fee, an hourly rate, or a percentage of assets. 1% of a portfolio’s value is a very common fee-only compensation. CFPs (certified financial planners) and RIAs (registered investment advisors) are typically fee-only financial planners because they are bound to the fiduciary approach.

How does a fee-based financial planner work?

Like fee-only financial planners, the fee-based financial planner also gets paid directly by the client. The difference is they may also be receiving compensation or commission from the products they are recommending. Not surprisingly, this can set up a conflict of interest when considering how to build a client’s portfolio.

Potential commissions may include:

  • Brokerage commission when acting as a broker-dealer
  • Insurance commissions when selling insurance policies
  • Mutual fund commissions when selling mutual fund shares

How do I choose between fee-based and fee-only?

We recommend working with fee-only financial planners because they are bound to put your interests above anything else and to build a portfolio that works specifically for you. However, choosing a financial planner is a personal design and you need to feel comfortable with the person or people who are handling your portfolio. Either way, make sure to ask your financial planner how they make their money and ensure that you are both informed about and comfortable with the answer.

Peninsula Wealth is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Peninsula Wealth and its representatives are properly licensed or exempt from licensure. This material is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Peninsula Wealth unless a client service agreement is in place. It is expressly understood that our firm will not provide accounting or legal advice nor prepare any accounting or legal documents for the implementation of your financial planning objectives.