Financial advisors and planners help you manage your investments and work toward your financial goals, such as estate and retirement planning. In return for their expertise and guidance, some advisors will charge a flat fee, while others work on commission. Some may even do both. But how are those fees determined and who pays for them? Whether you’re already working with an advisor or just starting to explore your options, make sure you understand their fee structures so that you can be sure that you’re getting the best fit for your needs. This overview can help you start that conversation.
Commission-based financial advisors
Financial advisors working on commission tend to be brokers compensated based on product sales. While they receive payment when you make an investment on their recommendation, typically their commissions are not drawn from your investment. They’re usually paid out by the investment product sponsor. In most cases, the advisor will receive an initial disbursement when the investment contract is signed and an additional annuity for every year that contract remains active. Some financial products — life insurance, for example — are only sold on commission.
As a result, commission-based advisors are effective representatives for certain products. They are held to a suitability standard, meaning product recommendations must be suitable to a client’s needs but may be more expensive than other options. Brokers are incentivized to offer more expensive options to increase their commission. As a result, the commission introduces the possibility of a conflict of interest in the advice these advisors provide.
Fee-based financial advisors
Some financial advisors will charge a set fee for their services. These fees may take the form of an hourly rate, a project fee, or a percentage of assets under management they handle on your behalf.
Additionally, some advisors may operate strictly on a single fee structure, while others may combine them. For instance, your advisor may begin working with a flat fee and then continue working on a percentage of the assets they manage.
In most cases, fee-based financial advisors are fiduciaries, which means they are legally required to act in their client’s interest, building plans and choosing products that are ideally suited to your needs. By law, they must recommend products and services to you that best meet your requirements rather than those that might provide them a commission.
In some cases, fiduciaries may be dual-registered, meaning they are registered as both fiduciaries and brokers. This means they can act as fiduciaries when creating your financial plan and also draw a commission when putting the plan into action. In such cases, the advisor may offer clients a roster of “preferred” financial products within their role as fiduciary and collect commissions if and when clients invest in them. That said, if there are cheaper options that offer the same benefits as a fiduciary, an advisor must present them as an option.
If you’d like to understand our fee structure, let’s have an open conversation so you can better understand the services we offer and how we charge for them. Additionally, you can use the Security and Exchange Commission’s Investment Advisor Public Disclosure website to look up our Form CRS, which outlines our services, fees, and any conflicts of interest. It’s important that you feel confident and informed about our working relationship, and we’re happy to provide you with any information you need to make the best decisions for your financial future.
Financial Consumer Agency of Canada. “Choosing a financial advisor.” Government of Canada.
Lazaroff, Peter. “What is a Fiduciary? Dual Registration Can Make It Harder to Tell.” Plancorp. https://www.plancorp.com/blog/is-your-advisor-a-fiduciary. Accessed 9 Feb 2023.
Pinkerton, Julie. “What to Know About Financial Advisor Fees and Costs.” U.S. News & World Report. https://money.usnews.com/financial-advisors/articles/financial-advisor-fees-and-costs. Accessed 9 Feb 2023.
Tarver, Jordan. “How Much Does a Financial Advisor Cost?” Forbes Advisor. https://www.forbes.com/advisor/investing/financial-advisor/financial-advisor-fees-and-costs/. Accessed 9 Feb 2023.
Wohler, Roger. “What You Need to Know About Fee-Only Financial Advisors.” Investopedia. https://www.investopedia.com/articles/investing/102014/feeonly-financial-advisers-what-you-need-know.asp. Accessed 9 Feb 2023.