How Financial Advisors Get Paid Can Impact Your Portfolio

by Nikki Carter

A person counting money

Did you know that 34% of adults polled don’t know who to consult for financial advice? Many feel like they don’t have the know-how to plan on their own, and are overwhelmed by the intricacies of the financial tools available to them in the choose-your-own-adventure financial world of 2020.

So, the next logical step is to turn to someone whose job title indicates they know how to do exactly what you’re unsure about: a financial advisor.

Most financial advisors are experts who have put a considerable amount of time into learning about markets and financial planning to help clients meet their current and future financial goals. Beyond their advanced financial knowledge, financial advisors are not emotionally tied to your money, which makes it easier for them to make objective decisions and stay calm when the market hits a downswing.

If you’ve decided you want to work with an advisor, we commend you on planning for your future. It’s important to make sure you pick the right financial advisor for you, based on a range of factors including how they get paid, which can influence the type of advice that they give. Let’s dive in a little deeper to the main categories of financial advisor compensation: commission-only, fee-only, and fee-based.

So…how do financial advisors get paid?

Commission-only advisors

Commission-only advisors receive a commission based on the products they sell to you. This can present potential conflicts of interest. Think about it: When you go to the car lot, do you trust the car salesman’s first recommendation? You probably imagine that he wants to sell you the most expensive car, so he can take home the highest commission. This is a point of concern with commission-only financial advisors as well.

Though it varies, commissions generally run between 3-6% of your investments. Concern over this model has led to lots of discussion surrounding fidicuiary responsibilities of advisors, or their obligation to act in their clients’ best interest. Not all advisors are fiduciaries, and you should look for one who is.

Fee-only advisors

Fee-only advisors will never charge you a commission, and they don’t get paid based on the products they recommend. They may charge an hourly rate, a flat fee for their services, or work off a retainer for agreed-upon services.

Because they’re not motivated by a potential commission, there is no inherent conflict of interest in the relationship. Fee-only advisors get paid the same amount, no matter what advice they give you, so they may be more motivated to act in your best financial interest. A fee-only advisor who is also a fiduciary is required by law to act in your best interest.

Fee-based advisors

The last category of advisors is comprised of fee-based advisors. This group charges using a combination of the two other models. For example, an advisor might charge an hourly rate for her time and then also recommend a product that charges a commission. In this scenario, you would pay the total of the advisor’s rate and the commission.

Keep in mind that because this model allows the agent to receive commissions, so once again there is the potential for conflicts of interest.

Related: What Is the Difference between Fee-Only and Fee-Based?

Choosing an advisor

In the end, you have control over the advisor you chose. Fee structure is just one criteria in determining whether or not you should work with them. You’ll also want to consider their qualifications and certifications, as well as their bedside manner.

It’s also important to consider if the advisor you’re talking to specializes in clients that have a similar financial situation to yours, so they can adequately draw on their experiences. When it comes down to it, commission or not, you need someone you can trust on every level.

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