How Does Your Financial Advisor Get Paid?

The last time you were in a doctor’s office did you ask or wonder how much they get paid?  When it comes to important things in our lives the cost is secondary. In the case with the doctor, we are more concerned with getting better. In working with your financial advisor, you want to make sure you don’t run out of money.

I believe you should know exactly what you pay your advisor.  I send all my clients a very easy to read invoice and all their performance reports include a line for management fees.  Knowing what you pay your advisor helps build trust.  In fact, I have written in some detail more about the trust topic HERE.  With that, I believe it is far more important to know how they are getting paid.

Let’s go back to the hypothetical doctor visit. Assume you have a heart condition that needs medication for treatment. All other things being equal, what doctor would you rather see? One that is compensated from the drug companies or one that is paid directly by you and your health care provider? While that is just a hypothetical in healthcare, that is exactly the choice you have with financial advisors. Most are compensated in one of two ways:

1. Commissions – Many investment products (mutual funds, annuities, private equity and insurance) contain commissions or kickbacks paid to the investment advisor selling the product. They can range from 0.25% up to 6.00% of your total investment. It is not so much the amount of the commission as your advisor has an incentive to use those products over others which could serve your portfolio better.

2. Fees – The other way advisors get paid is through fees paid by the client. It is usually a flat fee for service or a percentage of the assets they are managing. When paying a fee, you should understand exactly what you are paying for. What services and value is the advisor providing you?

There is no right way for an advisor to be compensated. As the client, you should know how much you are paying in fees and commissions. More importantly you should understand how they are getting paid to make sure it is in alignment with your success. As always, please feel free to contact me anytime to discuss this topic or any other in more detail.