Executive Summary
It’s a common question that clients seeking financial advice ask themselves: “How do financial advisors get paid?” After all, clients are curious about the money—and motives—behind the people giving them financial advice.
It’s completely understandable. It’s not like every financial advisor makes “X” dollars per hour or a typical salary. In fact, the financial services industry has so many compensation models it will make your head spin!
Honestly, when it comes to financial advisor compensation the most important thing you need to expect is full disclosure! If you know what you’re paying—and what value you’re getting in return—you can make a good judgment call if a financial advisor is worth it or not.
I’d far prefer a financial advisory relationship based on full compensation disclosure! If your financial advisor gets paid in some hidden way it can engender ill-will or even contempt.
Knowledge is the key to knowing how your financial advisor is paid and if that compensation model creates any issues in the financial advice they provide you.
How much do they make? What do they charge? Who pays them? How can a financial advisor help me? And is a financial advisor worth the money?
Like any career, there are several factors that ultimately influence how a financial advisor gets paid and where that money comes from.
Let’s take a look at how a financial advisor gets paid.
How does a financial advisor get paid?
The way financial advisors make money is dependent on the type of compensation model used by the individual financial advisor or the firm for which they work.
Some financial advisors work independently. Other financial advisors work for a broker-dealer or registered investment advisor firm.
The basic compensation models for financial advisors are:
- A base salary plus potential bonuses
- Commissions
- Fees
- Fees AND commissions (fee-based financial advisors)
Financial advisors on a salary (and bonus)
Some financial advisors may work for a firm that pays a base salary. Some firms even provide benefits such as a 401(k), FSA, HSA, or health insurance.
On top of this, the financial advisor may be able to make more money in the form of bonuses. Bonuses are typically paid when the advisor is able to bring in new clients with assets the firm can manage or products the firm can sell them.
More new clients and more new assets means more revenue for the company!
Other financial advisors may work in a similar compensation model with a base salary with the possibility to make commissions from investment or insurance products.
For example, I started out like this in 1995 with Dean Witter Reynolds. I had a base salary that decreased each month (that was painful as I was building my business) and my commission percentage grew to help compensate for the loss of salary.
After 12 months I had no salary at all. I had to go out and hunt for my income by selling insurance and investment products.
I HATED it!
I hated having to sell insurance and investment products in order to put food on the table! I wanted to do the right thing, but the “right thing” didn’t always pay as much as the company’s products did.
Talk about a double-edged sword! Do you want to eat this month or help Mr. & Mrs. Jones make the most of their retirement planning? Those two things weren’t always mutually exclusive, but the conflicts of interest definitely existed (and still do today).
That’s an extreme example. However, it was and still is a question financial advisors still grapple with today.
The flip side of that difficult compensation model was it was a great learning experience! I learned that hard work paid off, and I could be successful by helping people be financially successful!
Commission-based financial advisor compensation
Ever bought a car? Then you know what I’m talking about. This is about as simple as it gets!
Commission-based financial advisors sell insurance and investment products for a chunk of money. It’s a sales job, not financial planning and advice.
If your financial advisor is paid from commissions they’re not a real financial advisor they’re a product pusher! And if you don’t know how your financial advisor gets paid . . . YOU NEED TO FIND OUT HOW YOUR FINANCIAL ADVISOR IS PAID!
How much do commission-based brokers make?
Financial advisors—eh hem, commission-based brokers—could earn an average of 5%-10% of the product amount sold. The product could be something like life insurance, a limited partnership, or an investment vehicle such as a mutual fund.
Let’s say you had $30,000 dollars to invest and the advisor recommends investing that money into an ABCD fund with a 5% commission. $1,500 of that $30,000 would go to the financial advisor and the other $28,500 would be invested.
What’s really scary is your retirement nest egg of let’s say $200,000 could net an insurance broker $20,000 for an annuity sale! Did they earn that $20,000?
Did that “financial advisor” minimize your taxes, mitigate your risk, invest your funds wisely, help plan your estate, maximize your Social Security, and chart a path from now until your legacy begins?
Did they really do the things the best financial advisors do? Or did they sell you a product?
And once that product sale is over, what incentive do they have to help you with future financial and retirement planning needs? They already got their fat commission after all . . .
It really just depends on where the financial advisor is working and what products they’re selling. Some commissions and bonuses may be quite large. Others are moderate but it’s rare they’re small relative to the investment made.
So maybe you need a fee-based financial advisor? Maybe not . . .
How a fee-based financial advisor is paid
A fee-based model is very similar to a commission model. Typically, financial advisors that work under a fee-based model can charge fees to some clients and sell products which pay initial and recurring commissions to other clients.
Sometimes they sell commission-based products AND sell you services for fees!
The “fee-based” model is widely misunderstood. It’s a slick Wall Street term designed to make you think this type of financial advisor is on your side and acting in your best interests. It’s not necessarily the case!
Be wary, the fee-based model is synonymous with ‘salesperson.’
Under the fee-based financial advisor model, these advisors can receive a combination of the two . . . they can sell products for commissions and sell services for fees.
Do not confuse the fee-based compensation model with the fee-only model as they are very different.
How do fee-only financial advisors get paid?
The fee-only model is just that, fees only – no commissions (because they aren’t selling you anything). The fee-only financial advisor may charge a set fee for an hour of time, a set fee for a project financial planning engagement, or charge a previously agreed-upon percentage of assets under management.
If your financial advisor is fee-only they should fully disclose their fees to you and agree to them in writing. There should be nothing hidden!
They should also disclose any conflicts of interest so you understand any aspects which may sway their financial advice to you.
The fee-only financial advisor compensation model is closest to how your attorney or CPA gets paid. It’s a fully transparent model. This makes it super easy to gauge if your financial advisor is worth it or not because you don’t have to guess what their compensation is.
What’s the best way for your financial advisor to get paid?
If you are looking to hire a financial advisor, the gold standard is to find one that charges fees-only. This is hands down the best compensation model for clients. Honestly, it’s the best compensation model for financial advisors too!
As a financial advisor, you shouldn’t make some giant chunk of money for selling an insurance or investment product. If you do, you’re not a financial advisor you’re a salesperson!
As a financial advisor, your interests are aligned with your clients if you’re getting paid on a fee-only basis. The better you are at solving your clients’ money problems and helping them create a prosperous future, the longer they’ll engage you . . . And if you’re one of the best financial advisors they’ll likely never leave you!
The other compensation models are inherently flawed and ripe with conflicts of interest.
Non-fee-only models allow—or even encourage—financial advisors to increase their compensation at your expense by selling you more products.
This leaves the doors wide open for misguided or biased financial advice. The focus is for the financial advisor or a firm to make more money, not necessarily to develop a holistic financial or retirement plan for your future.
This doesn’t mean that financial advisors working under commission or fee-based models are always bad people, they aren’t. But they are far more likely to give you financial advice that puts more money in their own pockets leaving less in yours.
Fee-only financial advisors are typically fiduciary financial advisors, fee-based financial advisors are generally not
If you’re going to trust your financial future to a financial advisor—you need to educate yourself first!
You’re reading this article so you’re well on your way. But I need to make sure you understand the “suitability standard” vs. the fiduciary standard.
In fact, there is a big difference in the professional standards between fee-only financial advisors and everyone else.
Fee-only advisors adhere to the fiduciary standard while the other compensation models only require their financial advisors to adhere to the “suitability standard.”
The suitability standard means that the financial advisor only has to give advice that is “suitable” to clients.
If you were working with a doctor to lose weight, and the doctor only had to follow a suitability standard, the first thing he or she might recommend is weight loss surgery. And let’s imagine that your doctor gets a juicy commission paid by the surgeon every time they send a new patient.
Of course, this hypothetical doctor is going to feel a little pressure to send as many patients as possible to the surgeon! She’s got to put food on the table after all . . .
Sure, weight loss surgery might be “suitable” for you and may help. But, should that be the first recommendation? Is that in your best interests?
However, financial advisors working under the fiduciary standard have a legal, moral, and ethical obligation to make recommendations based solely on the best interests of the client. They don’t have any products to sell you, and they tell you exactly what the expected fee is prior to the engagement.
Going back to our hypothetical patient and doctor, if they have a fiduciary relationship without the conflict of interest of any commissions, the doctor is going to develop a holistic plan (diet, exercise, therapy, and maybe even some medicine) in order to achieve weight loss. Why? Because that’s what is best for the patient. Only when that fails will surgery be recommended.
That’s what you and your family need. A holistic plan designed to build wealth, protect assets, minimize tax burdens, and serve future generations.
Again, don’t fall for the “fee-based” compensation model. It is a marketing tactic and a fancy way of saying that the advisor charges fees and/or earns commissions.
What do financial advisors charge?
Fee-only financial advisors charge fees based on the type of advisory relationship you need. They also charge based on the advisor’s experience, expertise, education, credentials, and the complexity of the service provided.
Some pretty average numbers of fee-only financial advisor prices are:
- Hourly fees – $150 to $500/hour
- Project planning fees, for example, a one-time financial plan creation engagement – Typically $1,000 to $5,000
- Investment management fees depending on the complexity and amount of assets managed.
- A common fee formula would as follows:
- 1.5% fee for assets under $250,000
- 1.25% for assets $250,001 to $500,000
- 1% for assets $500,001 to $1,000,000
- .75% for assets $1,000,001 to $3,000,000
- A common fee formula would as follows:
Other advisors may charge an hourly fee to meet with a client and then either a monthly or a yearly retainer fee for certain ongoing services. In fact, the monthly retainer fee model is becoming more and more popular! I’m excited to see how that fee model works moving forward.
How much money do financial advisors make?
As you can see, there are several different compensation models available to financial advisors. The actual annual earnings depend greatly on the type of advisor, their education, credentials, experience, their ability to sell, their ability to grow their practice, and their location in the country.
According to the Bureau of Labor, median yearly earnings for financial advisors of all types in 2018 was: $88,890
Advisors working in the securities and investments arena made more, around $97,090. Financial advisors working mainly with insurance products earned a median wage of $66,600.
Selling insurance for commissions is a tough grind . . . but the commissions are generally big so you only need a few sales a year to make a decent living.
If we look at a range of earnings, the lowest 10th percentile of financial advisors earned $41,590 while the top 10th percentile made $208,000 in 2018.
How is does your financial advisor get paid?
Is your current financial advisor charging you fairly and appropriately? Do you have a fee-only financial advisor?
If your advisor is making commissions from the insurance and investment products he or she recommends to you do you really trust their financial advice and guidance?
If you are looking for a top-notch fee-only financial advisor in your area, check out The Fee-Only Network. You can also search “fee-only fiduciary financial advisors” in your area on your favorite search engine.
Before paying for financial advisory services, make sure you learn how to find a financial advisor in 5 easy steps. You’ll be far more likely to find the best financial advisor for your situation . . . one who has your best interests at heart!
Financial advisor compensation frequently asked questions
Financial advisors are paid in a variety of ways. Most commonly, financial advisors are paid from commissions and/or fees. Other financial advisors may receive a salary with possible bonuses. Some financial advisors earn fees only and do not accept commissions whatsoever.
Financial advisors typically charge an hourly fee, a project fee, and/or a percentage of assets they manage for you. Hourly fees range from $150 to $500, project financial planning fees range from $1,000 to $5,000, and the percentage of assets fee ranges from .50% to 1.5%. Other financial advisors don’t “charge” per se, rather they accept unknown commissions.