Fee-only advisers are paid only by clients and have no product sales commissions. Commission-based advisers earn money from selling products. Fee-based advisers do both. Fee-only advisers have the fewest conflicts of interest and always operate as fiduciaries under the Investment Advisers Act of 1940.
Why Compensation Structure Matters
How your financial adviser gets paid shapes the advice you receive. An adviser who earns 7% commission on annuity sales has a financial incentive to recommend annuities, whether or not theyâre ideal for you. A fee-only adviser has no such incentive.
This distinction is fundamental to the Series 65 exam. Investment Adviser Representatives operate under a fiduciary standard, which is inseparable from compensation structure. Understanding these differences helps you both pass the exam and serve clients ethically.
The Three Compensation Models
| Model | Compensation Source | Standard | Conflicts |
|---|---|---|---|
| Fee-Only | Client fees only | Fiduciary | Minimal |
| Fee-Based | Client fees + commissions | Dual (context-dependent) | Significant |
| Commission-Only | Product sales only | Suitability | High |
Fee-Only Advisers
A fee-only adviser is compensated solely by the client. Neither the adviser nor any related party receives commissions, rebates, or other compensation contingent on product sales.
Compensation Methods
Fee-only advisers typically use one or more of these structures:
AUM (Assets Under Management)
A percentage of the assets managed, typically 0.5% to 1.5% annually. For a $500,000 portfolio at 1%, youâd pay $5,000/year. Most common model, used by 62% of advisers according to Envestnet. Graduated fee schedules often reduce percentages for larger portfolios. See also: wrap fee programs.
Flat Fee / Retainer
A set annual or monthly fee for ongoing planning services. Typically $2,500 to $9,200 per year. Includes comprehensive financial planning and may or may not include investment management. Good for clients who prefer predictable costs.
Hourly Fees
Pay only for time used, typically $200 to $400 per hour. Median hourly rate is $300 according to Kitces Research. Best for specific questions or projects rather than ongoing management. Garrett Planning Network members specialize in this model.
Project-Based
One-time fee for specific planning work, typically around $3,000. Common for initial financial plans, retirement projections, or second opinions. No ongoing relationship required.
Fiduciary Standard
Fee-only advisers who are registered as Investment Adviser Representatives (IARs) operate under the fiduciary standard established by the Investment Advisers Act of 1940:
- Duty of Care: Provide advice in the clientâs best interest
- Duty of Loyalty: Put client interests ahead of your own
- Disclosure: Reveal all material conflicts of interest
- Ongoing Obligation: Continue to monitor and update recommendations
All fee-only advisers registered with the SEC must act as fiduciaries. This is not optional. Violations can result in enforcement actions, fines, and loss of registration.
Commission-Based Advisers
Commission-based advisers earn compensation when clients purchase financial products. The product provider, not the client, pays the commission.
Typical Commission Rates
| Product | Commission Range | Notes |
|---|---|---|
| Mutual Funds | 3% to 6% (front-end load) | Some funds have back-end loads instead; 12b-1 fees provide ongoing 0.25% to 1% annually |
| Fixed Annuities | 2% to 3% | Lower risk products, lower commissions |
| Variable Annuities | 4% to 7% | Complex products with higher compensation |
| Fixed Indexed Annuities | 6% to 8% | 10-year contracts typically pay highest commissions |
| Life Insurance | 80% to 120% of first-year premium | Plus 2% to 5% annual renewal commissions |
Suitability Standard
Commission-based brokers registered with FINRA operate under the suitability standard, not the fiduciary standard:
- Recommendations must be âsuitableâ for the clientâs situation
- Applies only at the time of sale, not ongoing
- No requirement to find the âbestâ option, only a âsuitableâ one
- No duty to avoid conflicts, only to disclose them
Under suitability, an adviser could recommend a high-commission annuity over a low-cost index fund if both are âsuitable.â Under fiduciary, the adviser would need to recommend whatâs actually best for the client, likely the lower-cost option.
Fee-Based Advisers: The Hybrid Model
Fee-based advisers charge client fees AND earn commissions from product sales. This hybrid model creates complexity.
The âTwo Hatsâ Problem
Fee-based advisers may be fiduciaries when providing fee-based advice but switch to suitability when selling commission-based products. This is called âwearing two hats.â
Fiduciary Hat
When providing ongoing investment advice and portfolio management for a fee, the adviser operates as a fiduciary with full duty of care and loyalty.
Broker Hat
When selling insurance, annuities, or commissioned products, the same adviser may operate under suitability standard with different disclosure requirements.
This dual standard confuses clients, who may not understand when their adviser is wearing which hat.
Understand Fiduciary Duty for the Exam
The Series 65 tests your understanding of fiduciary obligations, conflicts of interest, and ethical practices. CertFuel's adaptive practice questions help you master these concepts.
Access Free BetaConflict of Interest: A Practical Example
Consider a 55-year-old client with $300,000 to invest for retirement.
Commission-Based Recommendation
A commission-based adviser might recommend a 10-year fixed indexed annuity:
- Commission to adviser: $21,000 (7% of $300,000)
- Client impact: Surrender charges if withdrawn early, higher internal fees, limited liquidity
Fee-Only Recommendation
A fee-only adviser charging 1% AUM might recommend a diversified portfolio of low-cost index funds:
- Annual fee: $3,000 (1% of $300,000)
- Client impact: Lower costs, full liquidity, transparent fees
Over 10 years at 1% AUM, the fee-only adviser earns approximately $30,000. The commission-based adviser earns $21,000 upfront. But the clientâs outcomes differ significantly based on which recommendation truly serves their needs.
How to Identify Fee-Only Advisers
Verification Questions
Ask potential advisers these direct questions:
- âDo you or any related party receive commissions, referral fees, or compensation from product providers?â
- âAre you registered as an Investment Adviser Representative or a broker-dealer representative?â
- âWill you sign a fiduciary oath in writing?â
- âWhat percentage of your revenue comes from commissions?â
A true fee-only adviser will answer: no commissions, registered as an IAR, yes to fiduciary oath, and zero percent commission revenue.
Professional Organizations
Two organizations require strict fee-only standards:
NAPFA
The National Association of Personal Financial Advisors is the premier fee-only organization. Members must be strictly fee-only, hold a CFP certification, pass a peer review, and sign a fiduciary oath. Annual dues are $695. Use their directory to find advisers near you.
Garrett Planning Network
The Garrett Planning Network specializes in hourly, fee-only advice. Members must be fee-only, offer hourly services, and have no minimum requirements. Founded in 2000, the network provides accessible advice to clients of all wealth levels.
Form ADV Verification
Every Investment Adviser must file Form ADV with the SEC or state regulators. Part 2A (the âbrochureâ) discloses:
- Compensation methods
- Conflicts of interest
- Disciplinary history
- Affiliated businesses
You can search for Form ADV filings at the SECâs Investment Adviser Public Disclosure database. For more on the Form ADV filing process, see our state registration guide.
Item 5 of Form ADV Part 2A specifically discloses compensation methods. If it lists commissions, 12b-1 fees, or referral fees, the adviser is not fee-only.
Why This Matters for the Series 65
The Series 65 exam heavily tests fiduciary duty and ethical obligations. Understanding compensation models is essential for several tested concepts. Most candidates pass in 4-8 weeks depending on their background. Finance professionals often need just 4 weeks, while career changers transitioning to fee-only advisory typically need 6-8 weeks of focused preparation.
Frequently Tested Topics
- Fiduciary duty vs. Suitability standard
- Conflicts of interest disclosure requirements
- Prohibited practices related to compensation
- Brochure rule (Form ADV delivery)
- Custody and fee billing practices
These five topics span multiple exam sections. Laws and Regulations (30%), Economics (15%), Investment Vehicles (25%), and Client Recommendations (30%). Our week-by-week study schedule provides structured plans for 4-week, 6-week, and 8-week timelines, with daily topic assignments that ensure you master fiduciary concepts progressively while balancing all exam areas. Choose the timeline that fits your background and availability to start your fee-only practice on schedule.
Sample Exam Question Pattern
âAn investment adviser representative who also sells insurance products should:â
A) Disclose the potential conflict of interest to clients
B) Only sell insurance when itâs in the clientâs best interest
C) Provide Form ADV disclosing compensation arrangements
D) All of the above
Answer: D
This question tests understanding of dual registration and disclosure requirements.
About one in three Series 65 candidates fail on their first attempt, primarily due to preventable mistakes: underestimating regulatory memorization requirements, poor time management during the 180-minute exam, or over-relying on memorization without understanding application. Each failure triggers a mandatory 30-day retake waiting period. Thatâs an entire month of delayed client service, lost revenue, and watching competitors build relationships with your potential clients. Our common mistakes guide identifies the 10 traps that cause failures and shows you how to avoid them, so you pass on your first try and launch your ethical advisory practice without delays.
The Industry Trend
The financial services industry is shifting toward fee-based and fee-only models:
- 62% of advisers now use AUM-based fees as their primary model
- Nearly 75% of advisers use at least two pricing methods
- Insurance companies are creating fee-friendly product versions
- DOL and SEC regulations have increased fiduciary requirements
This trend makes understanding compensation models even more relevant for new IARs entering the profession.
Fee-Only: Compensation only from clients. Fiduciary standard. Minimal conflicts. Look for NAPFA or Garrett membership.
Commission-Based: Compensation from product sales. Suitability standard. Higher conflict potential. Common with broker-dealer registration.
Fee-Based: Both fees and commissions. Dual standard depending on activity. âTwo hatsâ problem creates confusion.
For the Series 65: Understand that IARs operate under fiduciary standard. Compensation structure directly affects conflicts of interest. Disclosure of conflicts is required, not optional.
To Verify Fee-Only Status: Ask directly about commissions. Check Form ADV Item 5. Use NAPFA or Garrett directories.