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You should always ask a financial advisor if they earn commission.
If you're in the market for honest, no-holds barred money advice, there's at least one question you can ask to weed out unfitting financial advisors: Do you earn a commission?
If they answer "yes," they're considered a fee-based financial advisor. Whether a financial planner or investment advisor, "fee-based" refers to the way they earn their money.
In addition to getting paid by the client, fee-based advisors may also get a kickback from directing you to invest in a specific fund or product or open a certain type of account - their fees are based, in part, on where you put your money.
This doesn't mean a fee-based financial advisor will necessarily work against your best interests. It only means that they may be more inclined to recommend products and services for which they get a commission, which may or may not be the best option for your financial planning needs.
Fee-only financial advisors, by contrast, do not get paid commissions. Their only objective is to provide sound financial advice to the client, who is paying them an hourly fee, flat retainer fee, or asset under management fee. They cannot accept kickbacks from insurance companies or brokerage firms if that's where their client chooses to put their money.
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Most importantly, fee-based advisors are not required to be fiduciaries. A fiduciary is legally bound to put their client's interests first. Instead, many fee-based financial advisors follow a loosely-monitored "suitability" standard, which allows them to make recommendations so long as it's suitable for their client's goals, risk tolerance, and financial situation. Usually this translates to recommendations that will also earn them money.
As Eric Rosenberg wrote for Business Insider, a fee-based advisor "may have an incentive to put your money in a fund that charges a higher fee because they get a commission even though a better performing or comparable fund that charges a lower fee is available."
In early June, the Securities and Exchange Commission (SEC) adopted a new set of rules for investment advisors and brokers requiring them to provide a "relationship summary" to clients before working with them, the New York Times reported. The document is meant to spell out fees, commissions, conflicts of interest, and legal conduct, but experts say there's no industry standard for how this will look, so transparency likely won't improve much immediately for the everyday investor.
For now, you can find exact fees and commissions for investment advisory firms with more than $25 million in assets under management laid out in Part II of Form ADV - a document filed with the SEC detailing the firm's operations. Some firms will link to the form on their website, but it's also available through a search tool on the SEC's Investment Advisor Public Disclosure website.
Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.
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