Education · Pillar
Fee-only vs. commission-based advisory
Published 2026-05-12 · Educational content; not investment advice.
How an advisor is paid determines what incentives the advisor has. Compensation structure is the single most important question to answer before evaluating any other claim a financial-services practitioner might make. This page lays out the three primary compensation models in U.S. financial services and the conflict-of-interest implications of each.
The three models
Fee-only
A fee-only advisor receives all of its compensation directly from the client. Typical structures include percentage-of-AUM, flat-retainer, hourly engagements, and fixed-project fees. There are no product commissions, no trailing 12b-1 fees, no insurance commissions, and no revenue-sharing payments from custodians or fund companies. The advisor's only economic relationship is with the client.
Fee-based
A fee-based advisor charges fees to the client AND may earn other compensation — typically product commissions or insurance commissions on transactions executed within the relationship. Fee-based practitioners are often "dual registrants" who hold both an Investment Advisor Representative registration and a Registered Representative registration with a broker-dealer. The terminology is similar enough to "fee-only" that confusion is common; reading the actual disclosure document is the only reliable way to tell.
Commission-based
A commission-based practitioner is paid by the product issuer when the client buys a product. Compensation may be a one-time commission (e.g., a load on a mutual fund), a trailing fee (e.g., 12b-1 fees), an insurance commission (often a multiple of the first year's premium), or a markup embedded in the price of a bond or structured product. The client does not write a check; the cost is embedded.
What each model rewards
| Model | Paid more when… | Built-in conflicts |
|---|---|---|
| Fee-only (AUM) | Client assets grow | Bias toward retaining assets in the managed account |
| Fee-only (retainer) | Fixed | Minimal at the recommendation level; scope/complexity creep |
| Fee-based | AUM grows AND products are sold | Both AUM and product-commission incentives |
| Commission-based | Products are sold; transactions occur | Strong incentive to recommend transactions and higher-commission products |
No model is conflict-free. Even a flat-retainer fee-only engagement has incentives (e.g., to expand the scope of the engagement). The question is which conflicts are present, how they are disclosed, and which legal standard the practitioner is operating under when they speak. See the related page on fiduciary duty for the corresponding regulatory framework.
How to verify in writing
For a Registered Investment Advisor, the firm's Form ADV Part 2A brochure is the authoritative disclosure. Item 5 covers fees and compensation; Items 10 through 12 cover other business activities, affiliations, code of ethics, and personal trading. Both can be retrieved from the SEC's IAPD search tool at adviserinfo.sec.gov. For broker-dealer representatives, FINRA's BrokerCheck (brokercheck.finra.org) is the equivalent.
How Tandem Private Wealth plans to operate
Tandem Private Wealth LLC plans to operate fee-only. Once registration is effective with the California Department of Financial Protection and Innovation, the firm intends to:
- Accept compensation only from direct client fees on a published, marginal-tiered AUM schedule.
- Decline product commissions, 12b-1 trail fees, insurance commissions, and custodian revenue-sharing.
- Disclose any incidental conflicts (e.g., the founder's outside business activities) in Form ADV Part 2A.
Pre-registration, the firm does not offer investment advisory services. This page is published as educational content only.
Frequently asked questions
What does "fee-only" mean?
A fee-only advisor is compensated solely by fees paid directly by the client — typically a percentage of assets under management, a flat retainer, an hourly rate, or a fixed project fee. Fee-only practitioners do not receive product commissions, trailing fees from mutual funds or insurance products, revenue-sharing payments from custodians, or any other third-party compensation tied to client recommendations.
What does "fee-based" mean and how is it different from fee-only?
A fee-based advisor charges client fees AND may also earn product commissions or other third-party compensation. The terminology is intentionally similar to "fee-only" and is one of the more common sources of confusion in financial services. A fee-based practitioner may be a dual registrant (Investment Advisor Representative plus Registered Representative of a broker-dealer) who wears different hats in different parts of the relationship.
What are the typical conflicts of interest in commission-based advice?
A commission-based practitioner is paid by the product issuer when the client buys a product. This creates incentives that may or may not align with the client's interest: incentive to recommend products that pay higher commissions; incentive to recommend share classes with higher trail-fees; incentive to recommend transactions over inaction. None of these are necessarily wrong on the merits, but each is a structural conflict that the client should understand and that disclosure rules require be addressed.
How do AUM fees create their own conflicts of interest?
AUM-based fee schedules are not conflict-free. The advisor is paid more when assets in the account grow, which is generally well-aligned with the client. But there are second-order conflicts: incentive to keep assets in managed accounts rather than recommend they be spent on outside priorities (paying down a mortgage, buying a property, gifting to family); incentive to consolidate assets at the advisor rather than recommend held-away accounts (e.g., a workplace 401(k)). A fiduciary advisor is required to navigate these conflicts in the client's interest and to disclose them.
How can a household tell which compensation model an advisor operates under?
The most reliable single source is the advisor's Form ADV Part 2A brochure (for RIAs) or the broker-check disclosure (for broker-dealer representatives). For RIAs, Item 5 of ADV Part 2A discloses fees and compensation; Items 10–12 disclose other business activities and affiliations. Asking in writing — "Do you receive any compensation other than the fees I pay you?" — and getting the answer in writing is also reasonable.