How Are Financial Advisors Compensated?
"A penny saved is a penny earned"
How are financial advisors compensated?
What terms do you need to understand when interviewing financial advisors?
What questions should you ask when interviewing financial advisors?
What are some tips for getting the most out of your appointment with your financial advisor?
It's important to understand how your financial advisor will be compensated to ensure they are acting in your best interest and not being influenced by their own financial incentives. It's also important to ask about any potential conflicts of interest and how they are managed to protect your financial well-being. Be sure to balance this cost of service with your anticipated savings/increase in your asset accounts.
There are 3 different business models for how financial advisors are compensated.
Fee-Based – These advisors are paid through a combination of fees and commissions. They will usually charge a flat fee (such as an annual, quarterly, or monthly retainer fee) for various financial advising services, and they can also earn a percentage from the managed portfolios or even commissions from insurance companies and/or brokerages.
Fee-Based financial advisors are usually best for high-wealth individuals as they typically offer a wider range of advising services and portfolio management.
Fee-Only – These advisors are compensated directly by the clients they work with. This method of compensation is considered to be the most transparent as it can help ensure your financial planner is acting as a fiduciary (putting the client’s best interests above their own) because they are not being incentivized by outside companies (i.e., insurance companies). This fee can be a retainer fee such as an annual, quarterly, or monthly fee, or even an hourly fee. (Hourly fees are usually for a short-term need that you think will go away soon.)
Fee-only financial advisors are often best for first-time investors, families with low to average assets, or those who want to buy specific types of financial advising services.
Commission-Based – These advisors receive payment when they sell a product or service to a client, such as insurance, stocks, or a mutual fund. Their commissions are usually paid by the companies providing the products that are sold.
Commission-Based financial advisors can be ideal for certain individuals/situations such as less active portfolios or if you are in the market for insurance, but these advisors should be pursued with caution as there could possibly be a conflict of interest since they make money when they sell you a product or make trades for you. Be sure to ask for the reasoning behind their advice and that you understand and agree. If a financial advisor makes you feel pressured or uncomfortable about a decision, you should move your business to another firm.
Salary-based – Some financial advisors work for financial institutions, such as banks or investment firms, and are paid a salary for their services. They may also receive bonuses based on the performance of the institution, but their compensation is not tied to the sale of financial products.
Finding the best financial advisor for your situation takes time and research. This is someone you should plan to work with for a long time, so just as you would for any big project, talk to friends and family about their experiences, and then plan to interview at least three advisors before making your decision.
Disclaimer: I am only learning myself, so I cannot guarantee this information is completely accurate, but my hope is that it can give you a good starting point if you are interested in finding a financial advisor as well. Be sure to do your own research and let me know if you have any additional information or corrections to add to this information.
To learn more, check out my Financial Professionals page for additional information.
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