Do you know how your financial advisor is paid?

It’s important to know how your financial advisor is compensated. Some make their money only from being paid by their client. Some are compensated through a combination of client fees and commission. And some make their money based solely selling financial products for commission. The method for earning becomes relevant if you’re concerned about conflicts of interest, and working with an advisor who puts your interests ahead of their own. In this article, we’ll review the various advisor pay structures, and how they impact you. 

What fee structures can advisors have?

There are several types of pay structures that financial advice firms may choose to use for their business:

• Fee-only
• Fee-based
• Commission

These pay structures can dramatically impact the type of service you receive from your financial advisor. Let’s dig into each type of fee structure, and how you can spot them in practice. 

How do fee-only financial advisors earn money?

Fee-only financial advisors operate with structured fees that are only paid by their clients. They don’t receive commission from the sale of insurance or other financial products. 

Fee-only advisors base their fees to the client on the following:

1. Assets Under Management (AUM). This means that an advisor charges a percentage of your total assets under their management as their fee. This specific fee structure is often a relatively common fee type for fee-only advisors who manage investments. 
2. Flat fee. Some fee-only financial advisors charge a simple flat fee to all clients for their services.
3. Sliding scale. Some advisors put together a fee structure that adjusts based on the complexity of the household they’re working with. For example, a single person who is a W2 employee may pay less than a married couple with children who are business owners. This way, the more complex a financial case is, the advisor can charge accordingly for their time.
4. Per plan. Some advisors don’t offer ongoing financial planning or investment management services. Instead, they charge for one-time plans that they then pass off to the client to implement on their own. 
5. Hourly. Some fee-only advisors offer hourly advice, or ongoing hourly services, for investors who want help with specific questions or financial roadblocks they’re running into. 

Although there are many different types of “fee-only” ways to get paid, the key difference is that advisors who are fee-only work for their clients exclusively. Because they don’t receive commissions from the sale of financial products, their advice is motivated only by their clients’ needs. 

How do fee-based financial advisors earn money?

Fee-based financial advisors are paid using a combination of client fees and commission from product sales. Most commonly, these advisors charge their clients a fee, similar to fee-only advisors, but also sell insurance products as part of their financial plans. It’s through these insurance products that they earn commission. 

It’s important to remember that although fee-only and fee-based advisors may sound similar, they aren’t the same. Because they earn a commission for the sale of financial products, a conflict of interest is present, and it could influence the financial advice they give to clients. 

How do commission based financial advisors earn money?

Commission advisors only earn income from the commission they make on the sale of financial products. These financial advisors typically work directly for an insurance company, or a larger financial firm that’s connected to an insurance company. 

How do fee structures impact the financial advisor ?

Any time commissions are earned from the sale of financial products, an advisor’s advice can be influenced. To be fee-only means that an advisor is free from these conflicts of interest and can truly put the needs of their clients first. Most fee-only advisors operate under the fiduciary standard – a legal obligation to put their clients’ interests above their own and to operate ethically at all times.

Financial advisors who use an alternate fee structure may think they’re able to operate under this same fiduciary standard, but the conflicts of interest they face by accepting commission pose a problem. Even if they’re exceptional advisors with the best of intentions, the opportunity for a misstep exists. 

The benefits of a fee-only advisor

Seeking out a fee only financial advisor can help to ensure that the financial advice you receive is without conflicts of interest. You’ll be working with a professional who you know works exclusively for you. In other words, your “wins” are their “wins” – they want you to succeed, because the fee you pay is their sole motivator. 

Be wary of any financial advisor who isn’t willing to discuss how they’re paid, and make sure to do your due diligence when researching potential advisors to hire. Advisors know how they’re compensated, and should be able to have a candid conversation with you about it, as well as any concerns you may have.