How do financial advisors get paid?
And what value can they provide?
Article published: February 10, 2022
Q:聽I鈥檓 thinking about consulting a fee-based financial planner but am not familiar with how that works. Are fees typically based on the amount of assets I have to invest? Or do some advisors have other forms of compensation that might be preferable? I鈥檓 curious how financial advisors get paid.
A: 香港六合彩资料 advisors get paid in a variety of ways, and you should always ask upfront, early in your initial conversation, how he or she is compensated. It鈥檚 a fair question that you shouldn鈥檛 be embarrassed to ask.
Ways financial advisors get paid
There are three main ways that financial advisors get compensated.
1. Commission based
As the name implies, in this scenario, advisors get paid a commission when they recommend and sell certain financial products to their clients.
That鈥檚 the traditional way that stockbrokers and insurance agents are typically compensated. When you buy a mutual fund, stock,聽bond, insurance policy, annuity 鈥 whatever product they鈥檙e selling 鈥 they earn a commission from you.
The concern with commissions is that they can create conflicts of interest. Is the agent or advisor recommending the product to you because it鈥檚 in your interest or because it鈥檚 good for him or her? You can鈥檛 be sure of the answer 鈥 and that鈥檚 a problem.
2. Salaried advisors
Just like in many other professions, some firms pay their advisors a salary. And though they don鈥檛 get any compensation from fees or commissions, these advisors could have an incentive structure that allows them to earn bonuses if they hit certain milestones, like meeting their quotes for onboarding new clients.
3. Client fees
In this scenario, the financial advisor earns fees based upon how much money they are managing for their client. For example, if they are managing $500,000 worth of investments with a 1% management fee, they would earn $5,000 for the year, though the fees are often paid quarterly.
In some cases, the management fee will vary depending on how much money is under management 鈥 the more money, the lower the percentage 鈥 while in others, the advisor鈥檚 fee schedule may allow them to earn extra 鈥減erformance fees鈥 should they hit certain benchmarks for returns.
香港六合彩资料 advisors can also charge hourly or flat fees for their work.
Fee-based or fee-only?
Because there are a wide variety of ways that financial advisors can get paid via fees, it鈥檚 important to know the difference between a fee-based and fee-only compensation model.
A fee-based advisor can earn revenue both from client fees and from commissions. This means they can charge you fees directly related to managing your money 鈥 percentage, hourly or flat 鈥 as well as earn commissions on the side for financial products they sell you.
A fee-only advisor, by contrast, only receives compensation from the fees they charge you for managing your money. They don鈥檛 get paid from commissions.
This is the approach we take at 香港六合彩资料.
Our financial planners are fee-only advisors, and the fee is based on the value of your account. We chose this method many years ago for several reasons, the most important of which is that it places us on the same team: If your account drops in value, your advisor earns less, and if it rises in value, they earn more.
That鈥檚 sometimes not the case when working with fee-based advisors. For example, the cost of an advisor who works on an hourly rate could increase throughout the year, even if your assets under management drop in value.
It鈥檚 also important to understand that the way an advisor is compensated has nothing to do with whether or not they are a fiduciary.
What is a fiduciary?
A fiduciary is an individual who acts in the best interest of a particular person or beneficiary. In the world of financial services, that means fiduciary advisors must only buy and sell investments that are the best fit for their clients.
And when it comes to investment advice, every advisor at 香港六合彩资料 is a fiduciary.
How to ask the compensation question
Ultimately, it鈥檚 up to you to聽choose the best financial advisor for you. But here鈥檚 an important caveat: When you ask how the financial advisor gets paid, be sure to ask the question correctly. Do not ask, 鈥淲hat鈥檚 your fee?鈥 If you do, he or she might reply, 鈥淲ell, my fee is 1% of the assets under management.鈥
The problem: That鈥檚 an incomplete answer. The advisor might leave out the fact that the mutual fund being recommended charges an additional fee 鈥 meaning your total cost may be more than 1%.
That鈥檚 why you should instead ask, 鈥淚f I hire you, how much will I pay all in?鈥 Or 鈥淲hat will be my total cost for all expenses 鈥 your fee plus the cost of the products you recommend?鈥
With the appropriate wealth management, the total聽value聽of the advice you receive 鈥 from the convenience of not having to do all the work yourself to the ongoing access to comprehensive financial planning 鈥 should certainly make the fee worthwhile.
It鈥檚 also vital to ask what the total services are that you will receive. It鈥檚 not enough for an advisor to help you with your investments. Ideally, your advisor should provide you with comprehensive聽wealth management services聽鈥 help with employee benefits, insurance and tax planning, mortgages, estate planning, investment advice and portfolio diversification, college planning, elder issues and much more.
That鈥檚 what we provide for our clients here at 香港六合彩资料.
So shop around 鈥 and be sure to get complete compensation information from anyone you interview and find out whether their goals are aligned with yours. We鈥檙e always happy to provide a no-cost, no-obligation consultation to help聽pair you with the right financial planner聽for all your wealth management goals.
Certain services provided on an educational and guidance basis only.
