When you are actively searching for a financial advisor, it can be challenging to know where to look and how to navigate the financial services landscape. There are a variety of industry terms and jargon for the services they provide which makes it more challenging to figure out who may be the best fit to meet your needs and how they are compensated. This article will attempt to define some of the common jargon you will come across in your search and simplify the fragmented landscape for consumers who are seeking financial advice.

Financial Advisor has become a “catch-all” term to describe financial services industry professionals. However, there are many differences in the types of services they may provide, the way they are compensated, and the standard of care to which they are legally obligated to uphold when giving financial advice. There are two standards of care prevalent in the industry – suitability and fiduciary. Suitability requires that an advisor make recommendations that are “suitable” to a client’s personal situation but does not require the advice to be in the client’s best interest. A fiduciary is a more stringent, and elevated, standard of care where recommendations must be solely in the best interest of the client (above the interests of the advisor or their employer).

There are many ways that a financial advisor is compensated, but generally they fall into three buckets – fee-only, fee-based and commission-based. A commissions-based advisor is paid based on the volume and types of financial products they sell and is usually held to a suitability standard of care. A fee-based advisor is paid commissions for selling products and is also paid fees generated from advice or from client assets that are professionally managed. Here’s where it can become confusing and complex for the consumer.

Fee-based advisors are usually held to a combination of suitability and fiduciary standard of care depending on the product or service they are discussing with their client. Products sold for commissions generally fall under suitability whereas charging an assets under management (i.e., AUM) fee is usually a fiduciary service. Imagine a single meeting where the advisor is discussing managing a client’s investment portfolio for a fee and in the latter part of the meeting is selling an insurance product (e.g., life insurance, annuity, long-term care). While discussing professional asset management services they are required to act in their client’s best interests as a fiduciary. However, they only required to recommend an insurance product that meets the clients needs but may be incentivized to sell a more expensive product to the benefit of the employer or the advisor themselves.

A fee-only advisor must always act as a fiduciary when working with their clients and is restricted on the types of compensation they can receive to reduce the number of conflicts of interest. They may only receive compensation from the fees they charge for the services they provide (often comprehensive financial planning and investment management) and cannot receive commissions or kickbacks for recommending certain products. They can charge fees by the hour, on a flat fee basis or, most commonly, an annual fee percentage (AUM) based on the investment assets they are responsible for managing on behalf of their clients.

Let’s look at three different financial advisors to illustrate:

Jennifer is a financial advisor for an insurance company. She works with prospects and clients and offers a free financial plan to recommend the purchase of financial products of the insurance company and other investment companies. She is paid a commission based on the number and types of products she sells to her clients. The products she sells have varying degrees of compensation. There could be three products that are suitable for her client’s needs, but they have She is regulated by FINRA and is held to the suitability standard of care. Jennifer is a “commission-only” advisor.

David is a financial advisor who works at a bank. He forms relationships with existing bank clients and offers a free financial plan used to recommend the purchase of products and services of the bank. He is paid in a few ways – on the investment assets he is managing, on the financial products he sells (e.g., annuities, investment and insurance products) and for referring clients to the lending department at the bank where he works. He is regulated by FINRA and the SEC and, depending on which product or service he is currently discussing, is held to either the suitability or fiduciary standard of care. David is a “fee-based” advisor.

Laura is a financial advisor for a fee-only Registered Investment Advisory firm. She works with clients and starts by building a financial plan. She may recommend the client purchase certain products as part of the financial plan, but she has no incentives to recommend any particular product or company over another. She is paid solely from the assets under management fee that she charges to manage and monitor the investment portfolios of her clients. The fee covers all aspects comprehensive financial plan which often includes investments, estate planning, tax planning and retirement planning. She is regulated by the SEC and is held to a fiduciary standard of care. Laura is a “fee-only” advisor.

Consumers may find it confusing that a professional with the title financial advisor can have wildly different business models and varying degrees of oversight on the quality of the advice they provide. The word ‘advice’ itself implies a recommendation would be in the best interest of the person on the receiving end of the recommendation. While no compensation model is entirely free of conflicts of interest, the fee-only model actively seeks to reduce conflicts and tilt the relationship towards what is in the best interest of the client and not themselves of the firm they work for.

This content is developed from sources believed to be providing accurate information, and provided by ReFrame Wealth, LLC. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.