Despite the talk of increased regulation of the financial community, many consumers continue to struggle to understand exactly how financial advisors are compensated for their work. As few (if any) financial professionals put their rates on a board like a sandwich shop, consumers' mystery is somewhat understandable. On the other hand, financial advisors must disclose all of their potential income sources from working with you; all you must do is ask.
Despite the many ways the compensation question might be answered, the simple reality is that there are three broad ways in which financial advisors are compensated:
- 1. Fee-only
- 2. Fee-based
- 3. Commission-only
Fee-Only Financial Advisors
A fee-only financial advisor receives compensation-typically an hourly rate-from working with you. Sometimes, the amount charged is simply a certain amount per hour; other times you agree to a set amount for completion of a specific project-a retirement plan, for example. Other fee-only advisors charge an asset management fee, calculated as a percentage of the assets the investment advisor manages on your behalf.
Fee-Based Financial Advisors
Fee-based financial advisors receive fees directly from their clients. In addition, they collect some commissions based on the products they sell. Since they receive both forms of compensation, this hybrid model is known as fee-based.
Commission-Only Financial Advisors
Commission-based advisors do not collect any fees directly from their clients. However, they do receive commissions from the companies which provide the financial products the advisor sells to you.
There are both excellent and poor financial advisors collecting each of these three broad forms of compensation. Most important is your taking the time to intelligently select the advisor most skilled at working with you and with the integrity it takes to get the job done properly.