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 Compensation: Advisory ...2 Views
Finance a la shmoop what are advisory fee limits? well they're basically a
price ceiling above which financial advisors can't go yeah I can't go they [Financial advisors in an elevator and hit price ceiling]
can't touch that ceiling you know like hammer time, can't touch this...
so when you invest in a mutual fund you pay two fees there's a commission
and there's an annual management fee usually based on the assets you have
with them under management like maybe it's one percent on the first hundred [Asset rises]
grand that you have and then half a percent above a million or whatever
but there is a third and insidious fee element in the world called advisory
fees like how do you choose which fund to buy well if you have a financial
advisor they'll walk you through the lists of mutual funds out there and [Ice cream flavors appear]
index funds and all other set of funds as well well they're like a gazillion of
them and then that advisor will charge you for their time in some form right
someone's got to pay for their beach house well if you start adding up all
the fees you're paying for arguably no better performance than had you just [Itemized list of fees appear]
logged onto schwab.com or fidelity.com and bought an index fund hmm
well then you're gonna start to pause here it starts to be a big number in
those fees that eat meaningfully into your investment returns most buyers of [Pacman fees eating up money]
mutual funds are not financial gurus yeah not like that they're doctors and
lawyers and plumbing parts distributors and they really don't have a
sophisticated understanding of just how badly they could get taken by
unscrupulous financial advisors so the industry placed a series of structured
limits to keep the non gurus safe from the financial predators when it comes to
compensation and fee limits you know on advisory services and predators like [Tiger walking by]
this guy
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