Updated: January 31, 2024
Do you know how your financial advisor is paid? 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.
Fee-only financial advisors do not receive commissions; their payment is solely from the client. There are different methods for a client to pay a fee-only financial advisor: flat fee, percentage of assets, sliding scale, per-plan, or hourly. Learn more about how fee-only financial advisors get paid, why it’s important, and how to choose.
There are three main 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.
As the name suggests, fee-only financial advisors and financial planners are paid only through fees from the client. They do not accept commissions or kickbacks on the products they recommend. That’s why you can trust that a fee-only financial advisor is recommending what they believe is the best course of action for your finances, and not what will earn them the most money.
Financial advisors who are not fee-only get paid in other ways. They may be fee-based, which means they accept fees from clients as well as commissions from the financial products they sell. Or a financial advisor may be compensated solely via commissions. These other methods incentivize the advisor to sell the products that make them the most money, even if they’re not necessarily the best for your situation.
A fee-only financial advisor only receives compensation from you, the client. However, there are several ways that a fee-only financial advisor can accept client payment. Each method is transparent, clearly conveyed, and upfront, so you know exactly what you are paying for—unlike with other advisors, who may not advertise the fact that they are accepting sales commissions as well.
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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 fee-only advisors may provide different types, tiers, or levels of service. For example, for one rate you may receive a detailed financial plan, while for another rate, you may receive a detailed financial plan plus investment advisory services. They may provide an upfront plan followed by a set price for quarterly or annual check-ins to see how your investments are doing, and to make course adjustments as necessary.
You may be familiar with advisors who charge a percentage of assets under management (AUM). With this payment method, the advisor’s fee is a set percentage of how much you have invested. For instance, if you have $1 million in assets, and your fee-only advisor charges 1% of AUM, your payment to the advisor is $10,000. This fee structure is a common fee type for fee-only advisors who manage investments.
A less common payment method is the sliding scale payment. Some fee-only financial advisors may make a sliding scale available where the percentage they charge goes down as your investments go up. So, for example, they might charge 1% of AUM for assets up to a certain limit, and only charge 0.5% of AUM for assets over that limit. This provides balance for successful investors, who might otherwise be charged much more than they’d like due to their assets.
Another type of sliding scale takes a household’s income or assets into account. 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.
For some investors, paying their fee-only financial advisor by the hour makes the most sense. An hourly payment arrangement ensures that you’re only paying for what you need, and compensating the advisor for their time. An advisor’s hourly rate doesn’t depend on how much you have invested with that advisor, either.
Hourly packages might include a retainer of up to a certain number of hours at an hourly rate with that advisor to develop your plan, with additional time billed hourly. Your advisor will make clear what services are included with such a package.
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.
Seeking out a fee-only advisor ensures that the financial advice you receive is without conflicts of interest. 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.
Allan Slider is the Founder of FeeOnlyNetwork.com, a one-of-a-kind digital platform that elevates the visibility of fee-only financial advisors, individually and collectively. Fee-Only advisors are ONLY compensated by the client and NEVER make commission by selling financial products, or receiving kickbacks from brokerage firms. Allan is a consumer & investor advocate and a 20+ year veteran of online marketing for financial advisors.
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