How financial advisors get paid
Typically, financial advisors are compensated in one of three ways; commissions, fee-based, and fee-only. There’s a lot of confusion and misinformation out there about how financial planners are paid for the services that they provide.
Compensation models are more important in the financial planning industry than in many other fields, because the structure used can have a significant impact on the objectivity and quality of the financial advice given to clients.
Commission-based advisors (i.e., stockbrokers) are paid when they sell you a financial product. Any financial advice that they provide is often tied to the fact that they get paid for selling these products, whether or not they’re the right financial products for your unique situation.
Commission-based advisors are only held to a standard of suitability, which means the products they recommend only need to be generally reasonable “suitable” for the client and situation. They’re not required to disclose the amounts of their commissions to their clients, nor are they required to disclose conflicts of interest that may influence a client’s ultimate decisions.
This means commission-based advisors can sell products that may be best for them, not for you.
Fee-based advisors receive commissions, but they may also be paid a fee by the client for the advice they offer.
Typically, these advisors manage investments on a fee-only basis, but they also sell other commissionable products such as life insurance or variable annuities.
Additionally, they may receive compensation from third parties for referrals or services related to their advice.
Similar to commission-based advisors, they are not required to disclose the amounts of their commissions to their clients.
Fee-only advisors are held to a fiduciary standard, which is the highest standard of care. Their responsibility is to serve their clients to the best of their ability.
They’re required to put their clients’ interests ahead of their own and to openly disclose any conflicts of interests they may have when providing recommendations or advice to their clients.
A fee-only advisor’s compensation comes directly from the client, not from sales commissions, undisclosed fees, or third party agreements.
As a result, you can be confident that the advice you receive is based entirely on your needs and objectives.
*All of the advisors in the Cleveland Financial Advisors Network are fee-only*
Why You should care how they charge
Contrary to popular belief, most financial advisors are not legally required to act in the best interests of their clients. Though many commissioned financial advisors do act in their clients’ best interests, the potential always exists for abuse and some of them regularly take advantage of clients who don’t know any better.
Working with a fee-only financial planner ensures that you are provided objective advice, so you can have confidence that the recommendations they make are for the right reasons.
Think of it this way, would you rather visit a doctor who is paid only to assess your medical situation and give professional advice based on what he/she learned in medical school and from treating patients over the years, or would you rather visit a doctor who is paid by the pharmaceutical companies whose drugs he sells?
Consider applying this same framework when selecting a financial planner to work with. There’s nothing necessarily wrong with receiving commissions for a sale, but problems do arise when receiving advice from salespeople trying to make a sale.
How The Advisors on Our Network Charge
There are a few different ways that our network of fee-only financial planners charge their clients:
- Hourly, As-Needed – Similar to how you might pay your accountant or attorney, many fee-only financial advisors simply charge by the hour for services provided to clients. This model is more common for limited projects of a defined scope than it is for ongoing financial planning services.
- Assets Under Management (“AUM”) – More commonly for investment managers, they may charge clients a percentage of the investment portfolio that they manage. A fee of 1% per year is a common benchmark, though there are a wide range of options depending on the advisor and the types of services that they include. Fees will often decrease to lower percentages for larger accounts.
- Flat Fee– A simple, pre-defined amount that the client pays for either a project or for ongoing advice. Some advisors charge every client the same amount, some may vary the fee based on the complexity of the client or the client’s net worth or income.
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