How Do Financial Advisors Make Money?
If you’re in the market for a financial advisor, then the question about how financial advisors make money is very important to you. That’s because this question is really about how much money you will spend if you hire a financial advisor.
We want to help you understand this aspect of financial advising. The short answer to the question is: it depends. How financial advisors make their income is primarily a matter of what kind of service(s) they’re offering. Estate planning, for example, may have a different earning structure for financial advisors than managing a stock/bond portfolio.
No matter the service, however, the goal of the financial advisor remains the same: to ensure their client enjoys the best quality of life possible. With a goal as extraordinary as this, there are going to be costs. (By the way, every great, worthwhile goal has a cost.) The two types of costs you can expect to see with financial advisor services are fee- and commission-based.
Let’s start with fee-based costs, what they are and where you can anticipate them.
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Fee-Based Financial Advisors
If a financial advisor's service has a fee-based cost, this means they charge a flat rate for their service. This rate may either be a percentage of the total values of the assets they’re managing for you (i.e. assets under management) or an hourly rate. It may also be a fixed amount, paid just one time.
Another defining feature of fee-based financial advisors is that the fee is paid by the client. For example, a financial advisor who is only assisting you in reviewing your stock portfolio or who is developing a risk-management strategy for your investments may decide to charge you a one-time, flat payment. Another fee-based service could be the selling of your stocks, bonds, or ETFs (exchange-traded funds). In either case, if the financial advisor is fee-based, then the client can expect to pay that cost for themselves.
You may be wondering how you can be sure that someone charging you a fee is going to keep your best interests in mind. As it turns out, fee-based financial advisors are led by their fiduciary duties to ensure that the client’s best interests are always prioritized.
Fee-based advisors are not the only types of advisors, however. There are also commission-based advisors. Here’s a word on their earning structure.
Commission-Based Financial Advisors
Commission-based advisors are compensated based on a percentage of the total value of the goods they sell or accounts they open. In this way, their earnings are not the result of their clients paying them a direct fee. Instead, it’s usually the financial advisor’s employer or firm that’s compensating them. This is because the goods or accounts being open are the product of the firm/business.
Having a commission-based financial advisor can be a win-win, but isn’t always. Unlike fee-based financial advisors, not all commission-based advisors are bound by the same fiduciary standards. This has the result that, at times, commission-based advisors may be led by incentives created by their employer rather than incentives attached to their client’s best interests. More often than not, however, your interests and their interests tend to overlap.
One of the greatest benefits from using a commission-based financial advisor is that your return on investment may be less likely to diminish over time. This is because you’re not necessarily paying a fixed percentage on your investment earnings year over year, which would have the result of lowering your returns. So, with both fee-based and commission-based financial advisors, there are pros and cons.
Whether you’re opting for a fee-based or commission-based financial advisor, you’re still positioning yourself to benefit in the long run. Recall that the central goal of a financial advisor, independently of their earning structure, is to help you achieve your desired quality of life.
When deciding on using a financial advisor, people often find themselves trying to understand the difference between financial advisors and brokers. Let us conclude by clarifying the difference for you.
The Difference Between Brokers & Financial Advisors
Much of the confusion around the difference between brokers and financial advisors stems from the fact that they can offer the same service. A broker, just like a financial advisor, is capable of purchasing or selling stocks on your behalf, as well as setting you up with life insurance. Brokers, however, generally only participate in this part of a client’s financial life—the active management of portfolio investments. For this reason, their involvement in your financials may be short-term.
Financial advisors, conversely, are participating in the planning of one’s financial life, where this can include college-savings, stock-market investments, estate planning, and reaching overall financial life goals. Financial advisors intend to be with you for the long haul. They’re serious about helping you achieve your long-term life goals.
Upfront Advisor is in the business of connecting you to your ideal financial advisor. That’s what we’re here for. We want to help you reach your long-term life goals. And in this way, we want to help you reach your ideal quality of life.