The commission-based compensation model has been dominant throughout the investment-planning world, with the majority of financial advisors still in fact adopting this model. The general sense is that most financial advisors are indeed looking at moving away from the commission-based model to the fee-based compensation model, with positive sentiments echoed by the majority of financial advisory clients indicating that the fee-only model is the better of the two compensation models.

While the commission-based model is prominent mostly because it is the traditional practice throughout the industry, the evolving economic climate indicates that it might be suited for advisors to make the switch to the fee-based model. While many advisors are making this switch, it is not happening as quickly as sentiments among the advisors suggest it should be.

The growth in the fee-based model may be driven partially by lower commission rates and investors’ access to an array of investment products. Other reasons for advisors to put aside the commission-based model for the fee-based model are geared toward credibility and sustainability as advisors seek ways to differentiate themselves by taking a longer-term approach to managing client funds. Fee-only advisors build up much more credibility as they are in a sense forced into the integrity of providing comprehensive advice, since conflicts of interest are minimized in assessing and executing investment options for their clients. Bias is eliminated because there is no direct up-front benefit to the advisor (commissions) from investment classes they recommend to their clients. This model permits objective advice.

By way of sustainability, fee-only advisors command a much more stable income structure, knowing they will receive a flat fee for their services. This also covers the performance side of proceedings since satisfied clients account for repeat business, likely allocating more capital to the advisor who might be paid a percentage of the assets managed. Other “fee–based” models for financial planners might consist of an hourly fee or set monthly fee.

Clients stand to benefit from the fee-only compensation model for the same reason that the model is advantageous to the advisors; everyone knows what to expect from a flat-fee model. And clients are generally happy to pay this compensation for consistency and good performance, especially knowing this is the fee upon which their advisors depend for their living.

Clients are at liberty to switch to a different advisor at any time, keeping the advisors on their toes. A fixed-fee payment structure is particularly welcomed by clients since this eliminates the cumbersome process of having to work out and pay fluctuating compensation based on the performance of recommended investment classes. This is a big plus for clients that need their portfolios to be more actively managed. However, some client accounts with only occasional trading might better be served under the commission model. Nonetheless, according to one Toronto-based Investment Advisor: “Commissions are a friction point for client-advisor relationships in an era where trades can be done for $6.99. Advisors want to be paid for advice and monitoring portfolios 365 days a year, not just buying and selling.”

While fresh financial advisors entering into the industry are generally inclined to adopt the fee-only compensation model, it may not explicitly be the right model for all such professionals, particularly new-to-market advisors. New-to-market advisors might be better suited to mixing it up a bit, gaining some exposure to the commission-based model as well as the fee-based model. This might provide an opportunity to learn what works best for each type of client.

Ultimately though, the fee-based compensation model, however slowly adopted, seems to be the direction that the industry is moving toward and what clients prefer.