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The truth is that there are several ways a financial advisor can be compensated. Understanding financial advisor compensation can help you to select the right advisor who puts your interests ahead of their own.
Today 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:
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.
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 have a broad range of ways their fees can be implemented in practice. Here are a few examples:
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.
A flat fee advisor is a financial advisor who charges one set, flat fee for services over a specified period of time, usually a year. The arrangement may include a contract with payments spread over the length of the term. Services can include a comprehensive financial plan, ongoing advice, and investment management.
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.
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.
Some 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 component to remember 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.. Some advisors offer hourly advice, or ongoing hourly services, for investors who want help with specific questions or financial roadblocks they’re running into.
How Do Fee Structures Impact the Consumer?
The truth is that 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 still exists.
Understanding the Benefits of a Fee Only Advisor
Seeking out a fee only 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 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.