We’re starting a new series on the blog this week called the “Ask an Advisor” video series. The first question I’m going to answer is a question I’m asked on a regular basis and that is “How do financial advisors get paid?”
Watch the video below to learn more about the three main ways a financial advisor can get paid and the one that I believe is usually in the best interests of the client.
Problem with the video? The full transcript of the video can be found below.
“How Do Financial Advisors Get Paid?” Video Transcript
“What if I told you the way your financial advisor gets paid can literally determine whether or not you’ll be successful when it comes to managing your wealth?
I’m Tyler Gray, Founder and Principal Financial Advisor here at SageOak Financial and on this week’s “Ask an Advisor” we’re going to answer a question I get on a regular basis from folks and that is “How do financial advisors get paid?” or “How is MY financial advisor getting paid?”
There are really only three main ways that a financial advisor can get paid. And of those three ways, there is only one that I think is usually in the best interests of the client.
So what are they?
1. Commissions
This is the way the majority of financial advisors get paid today in America. These advisors will get a kickback from the product or service provider(s) they recommend.
For example…
- If they recommend a particular mutual fund, they might get a percentage of the amount you invest in the form of what they call a “load.” A “front-end load” is a commission paid when you buy a “load” mutual fund and a “back-end load” is a commission paid when you sell a “load” mutual fund.
- They might get a commission from selling you a life insurance policy or annuity product.
- They might get paid a commission based on each transaction in your account as is the case with many stock brokers.
2. Fee-Based (or Commission and Fee)
These advisors can either get paid with fees paid by you directly, they can get paid commissions like in the previous example, or they might receive a combination of both commissions and fees.
This is where things can get confusing for some people because “fee-based” sounds so similar to the third way advisors can get paid that’s called…
3. Fee-Only
The only compensation Fee-Only advisors receive are fees paid by you, the client. Even within the Fee-Only compensation model, not every advisor is the same when it comes to how they charge you for their services.
For example…
- They could charge you an hourly fee like you’d pay a CPA or attorney.
- They might charge you a fee based on a percentage of your net worth like we do here at SageOak Financial.
- Another common fee structure for a Fee-Only advisor is to charge you an annual percentage of the investable assets that they help you manage. For example 1% on the first $1 million is a common fee structure for many Fee-Only advisors.
I really like the Fee-Only model because it removes a lot of the conflict of interests that are inherent in the other two models.
For example, I just can’t imagine going to a doctor who gets a kickback from the pharmaceutical company for each prescription they write. I’d always wonder whether or not the prescription that they were recommending was really the best prescription for me or if it was the prescription that gave them the highest kickback.
Unfortunately, though, that’s how it works with many commission-based and some fee-based advisors.
The other problem that can arise with the commission-based and fee-based models is that it can be very difficult for some clients to determine how much their advisor is actually charging them.
I remember talking with a prospective client once about their current financial advisor. Towards the end of the meeting, the individual said, “You know, I’m not very happy with the level of service I’m getting, but at least he doesn’t charge me anything.”
I couldn’t believe it at the time, but the more people I talk to, the more I realize that it’s very common for people to think that their financial advisor’s services are free, especially when their advisor is a commission-based or fee-based advisor.
As the old saying goes though,”There’s no such thing as a free lunch,” and nowhere is that more true than in the financial advisory industry.
So, what does all of this mean for you?
To sum it up, it means that when you’re looking for a financial advisor, you should find an advisor that…
1. Pledges to act in your best interests at all times (i.e. a fiduciary)
2. Gets paid on a “Fee-Only” basis
Follow these 2 principles when searching for a financial advisor and you’ll be much more likely to find someone that will help successfully manage you and your family’s wealth!
Thank you for watching this week’s episode of “Ask an Advisor.” If you have questions about this or any other topic related to managing your wealth, feel free to email me at [email protected].”
