There are two basic categories describing how investment managers earn their money. Unfortunately, the terms sound very similar, as if they were designed to cause confusion. The categories: fee-based and fee-only.
Fee-only managers get paid directly by you. Their compensation comes (like the name says) only from the fees they charge their clients. Fee-based investors can charge fees also, but they can earn commissions on top of that.
Fee-only managers might be more expensive to you, since the only way they earn a living is by charging you money. However, their advice comes without any conflict of interest. They don't earn a commission from selling you any particular fund, so if they suggest a fund, you can assume they really think it's the best option for you.
Fee-based managers are subsidized somewhat by the commissions they earn by pushing certain products on their clients. That might make them cheaper, at least in terms of your out-of-pocket expenses. But because they earn a commission, you have to look out for a potential conflict of interest. Their advice might come with additional baggage that you'll have to weigh when deciding whether to buy into a fund they are pushing.
Related or Semi-related Video
Finance: What is a redemption charge?8 Views
Finance allah shmoop what is a redemption charge All right
well when you redeem shares of a mutual fund in
a deferred commission purchase structure there's a charge like you're
not paying your commission upfront you pay it later Remember
that most mutual funds are sold as a shares meaning
that the commission of the fund you're buying is paid
up front That is if you've invested ten grand on
a three percent up front commission structure while when you
step up on the swimming pool starting blocks and the
money is actively starting to be invested your actually starting
the race with ninety seven percent of that ten grand
or ninety seven hundred bucks with three hundred dollars having
gone to the broker for the pleasure of selling you
that fund but some mutual funds are sold as b
shares where there is essentially an exit fee or rather
where there is a charge when you redeem the fund
either because you just want to sell it or you
die in your estate liquidates it or martians kidnap you
and force you at martian gunpoint to call in a
sell order right Well in many cases redemption fees are
waived if you hold the mutual fund some extended period
of time like a year a few years five years
something like that If you hold the fund an extended
period the annual management fee paid to the people buying
and selling securities on your behalf can then cover the
broker's commission So the money managers aren't actually losing money
in the form of that three hundred dollar commission paid
you a broker who sold you ten grand of fund
only to have you three weeks later dump it and
move on to another funds Well there are other benefits
and having this system set up because it encourages mohr
careful selection of mutual funds and longer duration in holding
them And yes the obvious marriage and dating allegories apply
here But we just won't go So when you hop
in bed with a given mutual fund read the fine
print because well all kinds of hidden feed germs exist
in bedrooms airport bathrooms and glass elevators Well all around 00:02:02.98 --> [endTime] the world
Up Next
What is carry? Carry refers to the gain or loss on an asset by holding it. It can refer to the interest on a bond or the arbitrage between what a b...
What is a 12b1 fee? A 12b1 fee is paid on mutual funds. The fee is paid by investors and is used to market the mutual fund to other potential inves...
What is Compensation: Advisory Fee Limits? Advisory fees are paid to financial professionals for managing client funds. In general, the market dete...