Financial Advisor Compensation: How They Really Earn Their Keep
Do you know how financial advisors earn their keep? The answer might surprise you.
According to San Francisco wealth manager Daniella Rand, who’s been in the financial industry for two decades, compensation for wealth managers and financial advisors generally falls into three categories: commission-only, fee-only, and a hybrid model that combines commissions and fees.
Even within these categories, compensation can vary dramatically — commissions vary, as do management fees charged as a percentage of total assets under management. As you evaluate prospective financial advisors, you’ll want to pay close attention to precisely how much they stand to earn by managing your portfolio.
And if it’s not clear from publicly available information about their practice? All you have to do is ask.
For starters, let’s take a closer look at the three types of financial advisor compensation structures, then dive into the specific fees your financial advisor or wealth manager is likely to charge.
Financial advisors paid on a commission-only basis market financial products for which they earn sales commissions: mutual funds, insurance, annuities, even individual stocks. Before hiring a commission-only financial advisor, confirm that they’re a fiduciary — sworn to act in your best financial interests.
Fee-only advisors don’t earn commissions. Instead, they charge fees for service, such as:
- Project-Based Fees: Some financial advisors charge one-time, lump-sum fees for discrete financial planning projects. If you retain a financial advisor to develop a financial plan for your family without committing to a long-term relationship, you’ll likely pay on a one-time basis.
- Hourly Fees: Some advisors charge hourly fees for project-based or ongoing work. If your advisor charges an hourly rate, be sure you understand precisely what it covers.
- Management Fees: Management fees are typically calculated on an annual basis as a percentage of assets under management: for instance, a 1% fee on $1 million AUM adds up to $10,000.
Most fee-only advisors are fiduciaries, but you’ll want to ask each advisor you’re considering to be sure.
Fee-Based (Commission and Fees)
Fee-based advisors earn both fees and commissions. Models vary, but a typical arrangement finds a fee-based advisor charging clients an AUM fee plus earning commissions from sales of mutual funds or insurance products. Again, ask any fee-based advisor you’re considering whether they’re a sworn fiduciary.
What Is Your Financial Advisor Really Worth?
This is a difficult question. To answer accurately, you need first answer other difficult questions, like “what is financial preparedness worth to me?” and “how much do I value peace of mind?”
Most investors decide that financial advice is worth more than the dollars and cents on their account statements. When your overriding objective is to fulfill the long-term plans and goals you’ve set for yourself and your family, it’s difficult to put a price tag on competent wealth management.
You Get What You Pay For
At the end of the day, you’re likely to get the financial advisor you pay for. Put another way, experienced financial advisors and wealth managers charge what they’re worth, and their results speak for themselves.
As you narrow down your list of prospective financial advisors, remember that you’re making a choice whose ramifications could last for years or decades to come. Better to take your time and make the right call than rush into a relationship about which you have lingering misgivings.