What's the Difference Between a Broker & Fee-Based Advisor? [Video + Transcript]

Hi, I’m Amy Novakovich of Nova Wealth Management. I have this question that I got yesterday and I thought this might be beneficial for other people to know, too. I’m going to share it with you today.

So, the question was what’s the difference between a broker and a fiduciary or a fee-based advisor and how does it benefit me, the client? The answer is a broker will work on a transactional basis. Meaning when a trade is placed you will pay a commission. Now when that would benefit you is if there’s not a lot of trades placed. So, if somebody buys you three mutual funds and you plan on holding those mutual funds for 10 years, it doesn’t make sense to pay an annual fee if you’re just holding the same funds for 10 years. It makes sense to just pay the transaction fee and that’s it, you’re done. You’re paying the commission and that’s it.

Now a fee-based account is where you pay a percentage based on the assets that are managed on the account. So, for example, if you have a $500,000 account and the fee is one percent that’s $5,000 a year for the account to be managed, but you will not pay per transaction. So, it’s actually the opposite. Whether you have five transactions or 500 transactions you still pay the $5,000 or the one percent on the $500,000. and then that fee, obviously in dollars, either grows as that $500,000 gets larger or shrinks if the $500,000 loses money. So, the fee fluctuates, not the percentage, but the dollars fluctuate because it goes with the value of the account.

Again, on the broker side, the transactional side, the fee is the same. It depends on how many transactions and when the transaction is made and what type of investment is bought. That’s how that commission is
determined. It’s not determined on the value overall of the account, may be determined by the value of the trade amount, but not the overall account value. So, you could have a $100,000 account and place one trade, and I suppose that is based on the whole value of the account, but you could have a two million dollar account and the trade is $100,000 and the two people are going to pay the same amount. So, it’s not based on the overall value.

How does that benefit you? If there’s a lot of transactions, maybe a fee-based account makes more sense. If somebody’s managing that for you
and you don’t want to pay per transaction to the person that’s managing that, it might make more sense to pay a flat fee. Versus if you’re just going to buy some stock one time or buy a mutual fund one time it doesn’t make sense to pay the annual fee. It makes sense to just pay the transaction commission on that product or that investment.

So I hope that answers your questions. If you have any other questions please let us know.

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