Some people might say that if you have a small amount of assets or if you are a buy and hold type of investor you might be better off with a commission based representative. I can only tell you that when I left the commission world and became a fee based advisor I had never felt so liberated in my life. I am free from the need to sell anything. I am a consultant not a salesman. Before I could say I am being fair now I can prove it in writing. In my opinion use a fee based advisor. They are the most objective and you will not have to worry ever again if your advisor has some hidden agenda.
As Evan said, for a one time deal, it might make sense, but in that case, I'd probably look at using one of the discount brokers rather than someone trying to sell you an idea.
I recently had a reader of my blog, ask "Is There Such A Thing As A Good Stockbroker?" And I answered with this post.
Fifteen years ago there were advantages to working with a premier wirehouse in a commission-based relationship: access to products and services, liquidity, reporting, and support. Today the playing field has become level, and fee-only advisors generally have access to better investment products at a lower cost than wirehouse firms. Moreover, whatever supposed benefits may have existed with the commission model, the inherent conflicts of interest are insurmountable. Warren Buffet captured this truth in one of his many aphorisms: "Never ask a barber if you need a haircut."
Dan, If you are looking for isolated, one time, transaction based advice, it might make sense to use a commission based advisor to obtain and execute an idea. If, however, you are seeking a long term relationship with an objective advisor that you will meet and plan with on a regular basis, the commission model can't work because the only way the advisor is compensated is through changing your investments, which often is not in your best interest. In this case I would seek out an RIA who charges only fee's: either hourly or as a % of the assets he/she is supervising on your behalf. Best of luck!
Do a search for an article written for the "Journal of Financial Planning." The title is "Who's the Fairest of Them All? A Comparative Analysis of Financial Advisor Compensation Models" by Robinson (20 no 5, May 2007). You may be able to find copies on-line.
The article compares several compensation models, one of which is the commission model. For each model, the author covers the advantages and disadvantages of each type of compensation.
You have to differentiate between "Advisor" and "Product Rep." Some countries are forcing this to happen legally. You never need a commissioned based "advisor", you may need a commissioned "product rep". Specifically commissions make sense for transactional work. Namely, insurance. You still have to be careful who you go through, but if you need help making insurance decisions it will be a commission based professional and that is ok.
There is no reason to use a commission based advisor any more. It used to be true you could not access a decent fee only advisor unless you had a certain level of assets, but now there are plenty of ways to find a fee only advisor who works with smaller accounts. The Garret Planning Network is one way.
None. A commission based advisor may be driven to recommend what pays he/she the most rather than what is best for you. Fee based or Fee only advisor typically provide more unbiased advice.
I don't see any advantage to using a commission based financial advisor as they could be motivated to promote certain products not based on their suitability for you but because they receive a better payout. They are also inclined to change your investments more frequently driving up your expenses and eating away at your returns. Fee only advisors on the other hand are not compensated on a product basis. They are compensated by a negotiated percentage of the assets managed so there is no motivation to create turnover in your portfolio just to increase their profits. In summary, a fee only advisors goals are much more aligned with their clients goals, i.e. increasing your asset base increases their compensation.
The advantage would be to the advisor, not to you. The difference between a commissioned and fee-only advisor is the standard in which they are held accountable. The commissioned advisor only needs to fill out suitability form which in essence removes the advisors liability. The fee-only advisor must abide by the fiduciary rule which states "they must do what's in the clients best interest regardless of suitability". In other words commissions "client beware" responsibility is yours, with fee-only "advisor beware" responsibility falls on them.
I don't see a situation where using a commission based advisor would make sense.
If you want to "set it and forget it" open an etrade or scotttrade account.
If you need advice because you have zero investment experience, open an account at a robo-advisor.
If you want planning and a personalized portfolio, go to an RIA.