There are two main types of investment advisors out there. There is the commission based advisor and fee based advisor. Each has it’s own set of advantages and disadvantages. Here is a basic sketch of the 2 kinds.
Commission Based Advisors
These advisors are usually known as stock brokers. But they can also be commodity brokers, insurance brokers and the like. This type of financial planner charges a commission on transactions that you place to buy or sell securities. For example, when you buy 10 shares of Microsoft, you have to pay your broker a commission of $10-30 per trade.
Many of these stock brokers offer you investment advice as a way to lure you in as a client. Their mandate is to give you sound advice, but they are incentivized to get you to be active in the market. If you buy a bunch of stocks in just 3 companies and you hold your position there for years without selling and without buying more stocks, you broker is not making money. In fact, he would probably be livid.
So that brings us to the main disadvantage of commission based advisors. They aren’t rewarded to give you sound advice. They may do it out of the goodness of their own heart, and hopefully most at least follow some ethical guideline, but they have no incentive to do so. The best investment strategy for you might be to buy and hold stocks in just a few companies, but your stock broker won’t have any financial advantage to tell you that.
The main advantage to commission based advisors is that sometimes they have access to good research. These brokers usually work for large investment firms like Merrill Lynch, Morgan Stanley or Goldman Sachs and they are privy to research that other firms might not be able to offer you.
Fee Based Advisors
These are advisors that charge you a flat fee for their investment advice. They don’t charge a commission when they execute a trade for you. The might have to pay someone else a commission that they pass on to you, but they don’t make any money from you being active in the market.
These advisors have the more incentive than commission based advisors to give you objective input. If the best investment strategy for you is to buy, hold and not be very active in the market, then they have no financial incentive to tell you otherwise. Examples of fee based advisors would be ones from companies like Edward Jones or Ameriprise, formerly known as American Express Financial Advisors.