How Do Financial Advisors Get Paid?

The Financial Services industry is a murky mess when it comes to transparency around financial advisor compensation structure.Show more

In advance of investing time into interviewing financial advisors, understanding the three most common frameworks in which financial advisors are compensated can help narrow down your search.

1) Commission Based Financial Advisors
This type of financial advisor gets paid a commission on the front end when you - the investor - select an investment product that they recommend. They have a relationship with a broker-dealer or insurance company that incentivizes them to share a limited range of products with you such that the financial advisor is compensated for successfully steering you into the broker/insurance company’s product.

2) Fee-Based Financial Advisors
Fee-Based financial advisors receive a hybrid form of compensation. The financial advisor might do a “dollars-for-hours” style agreement for a financial plan (think retainer fee or hourly rate - similar to a CPA or lawyer). In addition, the financial advisor may also receive commissions for successfully steering you into investment products of companies with whom the financial advisor is affiliated.

3) Fee-Only Financial Advisors
Fee-Only financial advisors work on a “dollars-for-hours” arrangement. The financial advisor is compensated only from the fees they charge their clients. There is no relationship with outside vendors such as a broker-dealer or insurance company through which the financial advisor receives commission-based compensation.

**Assets Under Management Fee’s
Investors should note that AUM - “Assets Under Management” fees are ubiquitous across all three types of financial advisors. AUM fees are charged via “Wrap accounts”. If you as an investor choose to delegate the management of your investment portfolio to your financial advisor - the financial advisor is compensated via AUM fee’s - typically around 1% of the total value of the assets being managed.

How your financial advisor is paid is a critical question as you evaluate who you believe will provide you the best solutions for your need.

Before hiring any financial advisor or planner, you should know all forms of compensations they will receive.