Fee-Only vs Commission Financial Advisers - Which is Right for You?

Fee-Only vs Commission-Based Financial Advisers

One of the most important decisions when seeking financial guidance is understanding how your adviser gets paid. The two main models - fee-only and commission-based - have fundamental differences that can affect the guidance you receive.

This guide explains both models in detail, their advantages and disadvantages, and helps you determine which might suit your situation.

Disclaimer: This is general information only. Seek guidance from a licensed financial adviser for your specific situation.

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Understanding the Two Models

What is a Fee-Only Adviser?

A fee-only adviser charges you directly for their services. They do not receive any commissions, referral fees, or payments from product providers. Their income comes entirely from fees paid by clients.

Fee structures used by fee-only advisers:

Hourly rates ($150-$500/hour)
Fixed fees for specific services ($500-$10,000+)
Percentage of assets under management (0.5-2%)
Retainer fees (monthly or annual)

What is a Commission-Based Adviser?

A commission-based adviser receives payment from financial product providers when you purchase products through them. This might include:

Insurance companies paying commission on policies sold
Fund managers paying trailing commissions on investments
Mortgage lenders paying commission on home loans
KiwiSaver providers paying ongoing fees

Some commission-based advisers also charge fees, creating a "fee and commission" hybrid model.

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The Fee-Only Model in Detail

How Fee-Only Advisers Work

When you engage a fee-only adviser:

You agree on fees upfront (hourly, fixed, or percentage)
You pay the adviser directly
The adviser provides guidance based solely on your needs
No payments flow from product providers to the adviser

Types of Fee-Only Arrangements

Hourly Consulting

Pay for time spent on your situation
Typical range: $150-$500 per hour
Suitable for: One-off questions, second opinions, specific issues

Fixed Fee Projects

Agreed price for defined scope of work
Typical range: $1,000-$10,000 for comprehensive plans
Suitable for: Financial plans, retirement strategies, major decisions

Assets Under Management (AUM)

Percentage of portfolio value paid annually
Typical range: 0.5-2% of assets
Suitable for: Ongoing investment management

Retainer Model

Fixed monthly or annual fee for ongoing access
Typical range: $200-$1,000 per month
Suitable for: Ongoing relationship with regular needs

Advantages of Fee-Only

1. Aligned Interests

The adviser's only income comes from you. They have no financial incentive to suggest one product over another.

2. Complete Transparency

You know exactly what you're paying. There are no hidden costs built into products.

3. Product Agnostic

Fee-only advisers can suggest any product in the market, including low-cost options that don't pay commissions.

4. Focus on Planning

Without product sales driving income, fee-only advisers typically focus more on comprehensive planning and strategy.

5. No Churning Incentive

No reason to suggest switching products unnecessarily since they don't benefit from new sales.

Disadvantages of Fee-Only

1. Upfront Cost Barrier

You must pay fees regardless of whether you proceed with their suggestions. This can be a barrier for people with limited funds.

2. Higher Perceived Cost

Seeing a $5,000 fee feels more expensive than "free" commission-based service, even if the total cost is similar.

3. Limited Availability

Fewer advisers in NZ operate on a pure fee-only basis, especially for insurance.

4. Implementation Gap

Some fee-only advisers only provide guidance. You may need to implement their suggestions yourself or pay additional fees.

5. May Not Include Ongoing Service

One-off fee arrangements may not include ongoing support unless you pay additional fees.

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The Commission-Based Model in Detail

How Commission-Based Advisers Work

When you engage a commission-based adviser:

The adviser assesses your needs (often at no charge)
They suggest products from their provider panel
When you purchase products, the provider pays the adviser
The cost is built into the product pricing

Types of Commission Arrangements

Initial Commission (Upfront)

One-time payment when you purchase a product
Insurance example: 100-200% of first year premium
Investment example: 0-5% of initial investment

Ongoing Commission (Trail)

Recurring payment while you hold the product
Insurance example: 5-20% of annual premium
Investment example: 0.2-1% of balance annually

Volume Bonuses

Additional payments for selling certain volumes
May create incentive to favour certain providers

Commission Rates in NZ (2026)

Product TypeInitial CommissionOngoing CommissionLife insurance100-200% of premium5-20% per yearIncome protection100-180% of premium5-15% per yearHealth insurance20-50% of premium5-15% per yearTrauma cover100-180% of premium5-15% per yearManaged funds0-3% of investment0.3-1% per yearKiwiSaverNone typically0.15-0.5% per yearMortgages0.5-0.85% of loanVaries

Advantages of Commission-Based

1. No Upfront Cost

You don't need to find money for fees. The service appears free at the point of delivery.

2. Lower Barrier to Entry

People with limited funds can still access professional guidance.

3. Ongoing Relationship

The adviser has an incentive to maintain your business and provide ongoing service.

4. Claims Support

Insurance advisers have an incentive to help with claims to maintain the relationship.

5. Implementation Included

The adviser handles product applications and paperwork.

Disadvantages of Commission-Based

1. Potential Conflicts of Interest

Advisers may favour products that pay higher commissions, even if alternatives might suit you better.

2. Hidden Costs

Commissions are built into product pricing. You're paying, just not directly.

3. Product Focus

The business model requires product sales, which may shift focus from planning to selling.

4. Panel Limitations

Commission advisers may only access products from providers they have agreements with.

5. Churning Risk

Some advisers may suggest switching products to generate new commission income.

6. Less Suitable for Investments

For investment portfolios, commission-based models can significantly erode returns over time.

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Identifying Which Type an Adviser Uses

Questions to Ask

"How are you paid for your services?"

- Direct answer about fees vs commissions

"Do you receive any payments from product providers?"

- Identifies commission arrangements

"Can I see your disclosure statement?"

- Legal document explaining all remuneration

"What products and providers can you access?"

- Reveals panel limitations

"If I don't purchase any products, how do you get paid?"

- Tests whether they have a fee-only option

Reading the Disclosure Statement

All NZ financial advisers must provide a disclosure statement explaining:

How they're paid
Any commissions they receive
Conflicts of interest
How they manage conflicts

Look for:

Specific commission rates
Volume bonus arrangements
Soft dollar benefits (trips, gifts from providers)
Limited product panels

Red Flags

Potential concerns:

Reluctance to discuss fees openly
Vague answers about how they're paid
Pushing expensive products without comparing alternatives
Suggesting product switches without clear benefit to you
Only offering products from one or two providers

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When Each Model Suits Different Clients

Fee-Only May Suit You If:

You have significant assets

Commission drag on a large portfolio compounds significantly
Fee-only advice on $500,000+ can be more economical long-term

You want objective investment guidance

No conflicts about which funds to use
Access to low-cost index funds that don't pay commissions

You value independence

Want guidance without any product pressure
Prefer to make final decisions yourself

You have complex situations

Business owners, high-net-worth, complex tax situations
Need strategic planning, not just product sales

You're comfortable paying for expertise

Understand that professional guidance has value
Have the funds to pay fees upfront

Commission-Based May Suit You If:

You're purchasing insurance

Commission is standard for insurance in NZ
Hard to find fee-only insurance specialists
Ongoing commission supports claims assistance

You have limited funds

Cannot afford upfront fees
Need help but can't justify paying for it directly

You want hands-on implementation

Prefer someone to handle all paperwork
Value ongoing relationship without separate fees

Your needs are straightforward

Simple insurance or KiwiSaver needs
Don't require complex strategic planning

You value ongoing service

Want someone to call without worrying about hourly charges
Appreciate annual reviews included in the arrangement

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The Hybrid Reality

Most Advisers Use Both

In practice, many NZ financial advisers use a combination:

Common hybrids:

Fee for financial planning + commission for insurance implementation
Fee for investment advice + commission for insurance
Reduced fee + commission offset arrangement

The "Fee Offset" Model

Some advisers offer:

Charge a fee for their services
Credit any commissions received against that fee
You pay the difference if fees exceed commissions

Example:

Adviser fee: $3,000
Commission received: $2,000
You pay: $1,000

Why Hybrids Exist

For insurance:

Commission is deeply embedded in the industry
Very few insurers offer non-commission products
Clients expect "free" insurance service

For investments:

Fee-only is increasingly common
Commission funds are losing market share
Clients becoming more fee-conscious

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Making Your Decision

Decision Framework

Your SituationConsiderLarge investment portfolio ($500k+)Fee-only for investmentsPrimarily insurance needsCommission-based often practicalComplex planning requiredFee-only for objectivityLimited budgetCommission-based or hybridWant ongoing relationshipEither can workValue independenceFee-onlyWant implementation supportCommission-based

Important Considerations