Fee-only vs. Commission Investing: Which is Best?

If you’re looking on advice for investing, and all you want is a few hot stock tips, you’ve come to the wrong place. What we will talk about is how to build a comprehensive investment plan that will build wealth in your dental practice and home accounts. There are two main things you need to keep in mind when building the framework of that plan.

The first is that you must do your best to invest in a fee-only environment, as opposed to one where your broker or manager is being paid on commission. The vast majority of people – up to 95% – use commissioned advisors. What’s the difference?

Look at the kinds of investments each type of advisor makes. A commissioned advisor will have you invest more in mutual funds that have commissions or “loads” attached to them. Do you have investments in mutual funds that end the description of the fund with “Class A”, “Class B”, or “Class C”? If so, you are in a commissioned investment. All make your advisor a commission in different places – class A will have a 3-5.75% charge at the front end, class B will have the same charge at the back end, and class C has a back end charge that’s a bit smaller. In other words, if you invest $100, only $95 will actually go into the market if it’s an A share. The rest goes to your advisor and the company they work for. And these fees pile up.

A fee-only advisor is much cheaper in the long run, and much of the time will also make you more money, since investment returns are eroded by these higher commissions. In a relationship like this the advisor is paid only on the value of your accounts rather than by the transaction, meaning that there’s a much closer correlation between the performance of your investments and the amount that you’re paying your advisor.

That’s all important because of the second thing to keep in mind when building an investment strategy – minimizing cost is crucial. There are a lot of hidden costs associated with investing, especially for a commissioned advisor. Administration fees, management fees, 12b-1 fees, the commissions themselves – again, they all add up. Together, they could eat up 5-6% of your return. You have to look at the net returns to see if your investments are really earning you what you need them to earn.

A difference in rate of return of only 3% can change your final values by up to 16% over ten years. In 20 years, the difference grows to 41%. By boosting your rate of return only slightly you can earn nearly twice as much over two decades. That’s a lot of money.

Any book on investing will tell you that a fee-only advisor is the way to go as soon as possible. But most fee-only advisors will only work with accounts that are already over $500,000 or more. That’s why you need to get your practice and personal finances in order generally, so you can take advantage of this and other useful wealth-building strategies.