How do financial advisors make money? There are four main ways financial advisors make money, besides personal investments, or other income. Understanding how financial advisors make money, will help you to avoid costly fees and get more bang-for-your-buck.
How do financial advisors make money?
- Salary: A large number of accounting and brokerage firms will pay their salaries, usually with bonuses for making money. Quite often bonuses will be tied to individual performance as opposed to “team effort.” Unfortunately, this payment structure will lead to a more cut-throat environment and damage relations between employees.
- Commission: A commission is very similar to a fee based payment structure, however they are paid on services rendered. Meaning, the financial advisor is payed on the completion of the task. Commissions in most cases will be percentage based and/or fee based.
- Fee-Only Based: Having a fee based payment structure is very common among advisors who are not part of a financial firm. Fee-only based financial advisors are most often self-employed, and will be a Registered Investment Advisor (RIA). Watch out for fee-only advisors, they have minimum incentive for good recommendations because they are not financially involved. If you do go with a “fee-only” based service, it should be with an accountant or similar financial advisor who is tied to his work legally. Inside the fee based payment structure, there are also three substructures:
- Hourly fee financial advisors are paid some sum per hour, they are often quite expensive. In the case of hourly fee financial advisors you should always ask how much they will cost at a maximum, not an on average. Once you get an estimate on the maximum add another 20% and you have the “worst-case” scenario, then inform the advisor how much you are willing to spend. This could save you lots of money and the advisor will let you know if he/she is getting close to that limit.
- Flat fee financial advisors will often be accountants and the like, they are fairly safe to obtain services from as they cannot and will not go over their allotted fee. However, flat fee’s can often be more expensive than hourly fee’s, so only try to find a flat fee advisor if you have somewhat special circumstances and it will take longer to receive a service than the average person.
- Retainer fee, a retainer fee is an upfront cost (previous to any services provided) for a particular service. In the case of lawyers it is the fee you have to pay prior to them reviewing the case. Retainer fees are not refundable and in the case of financial advisors often a percentage of the funds they are going to manage. Financial advisors that require retainer fee’s are often used to fully manage a full financial portfolio.
- Commission and Fees: Noticeably different from fee-only and commission based payment structure. Not only will a flat fee be charged for a financial plan or explanation, but there will be a commission upon the delivery of a service rendered. One example of having a commission and fee based structure, is by delivering a fee based service such as a financial plan for you to be on a particular budget, but then offering a form of insurance (such as life insurance) to you. If you purchase the insurance the financial advisor will be paid a commission.