How Are Financial Advisors Compensated?
by Gabriel Lewit
In the world of financial advice and wealth management, there are a few different types of advisors—some who are compensated in ways that you may find favorable and others that are not. If you are wondering: “How do financial advisors get paid?” understanding these compensation models can help you make an informed decision when choosing your advisor.
A financial advisor in Buffalo Grove, IL, at SGL is here to make sure you know what you are getting into before you commit.
What types of financial advisors are there?
There are a few general classifications of advisors to know about when looking for the right professional to invest in with your time, trust, and money. These are:
- Fiduciary advisors
Fee-only financial advisors charge a fee directly to their clients. This compensation is typically based on the value of the advice they provide, regardless of how much money you invest or how many products they sell you.
The amount of your annual fee will vary depending on what type of financial services you need and how much time your advisor spends helping you. For example, some may charge $200 per hour for advice related to investing and estate planning, while others might charge an annual retainer ranging from $5,000-$15,000 for full-service financial management and guidance.
If you are considering a commission-based advisor, it will help to understand how they earn income from each commission. You should feel comfortable enough to ask about this per product or investment, to be sure they are focused on what’s best for you.
Be sure to ask your advisor plenty of questions, like their compensation structure before deciding whether or not he or she is right for you, and if there’s anything about their business practices that concerns you.
Fee-based advisors are typically paid a percentage of the assets they manage. The fee is usually charged on an annual basis, but can also be charged monthly or quarterly. The fee will vary based on the amount of assets under management and the services provided by the broker-dealer or registered investment advisory firm.
On average, a financial advisor might charge anywhere from 0.25% to 1% per year for managing your money in a brokerage account (the more assets they manage, the higher their compensation). In other words, if you have $100k invested with them this year and returns were 5%, then they would receive $500 in commission fees ($5k return / 100k asset size x 0.05%).
At SGL, we are fee-based fiduciaries working hard to help you reach your financial goals with zero conflict of interest.
Hire a fiduciary
Fiduciary advisors are held to the fiduciary standard, which means they must act in the best interest of you (their client) at all times. This helps to omit any differences within the working relationship. So, when doing your homework and interviewing advisors, ask if they abide by any standards.
As a fee-based fiduciary firm in Buffalo Grove, we are here to recommend and implement financial strategies that align with your financial goals.
When is the best time to hire a financial advisor?
There is no single best time to hire a financial advisor. If you are considering the idea, it’s important to consider your life situation and where you are in your financial journey. A few examples include:
- When you’re ready to make a major financial decision: It may be something as simple as deciding how much of your savings should go into tax-advantaged accounts like IRAs and 401(k)s—or as complex as deciding on an effective plan for paying off student loans.
- When you’re thinking about retiring early or changing careers: You’ll want someone who can help assess whether or not this is actually achievable given current market conditions, and if so, how long it will take (and what resources will fund retirement).
- When starting a business or making major investments in one that already exists. This involves risk assessment by the advisor so there aren’t any surprises down the line when things don’t go according to plan. The same goes with buying real estate: You’ll want someone who knows how much money needs to be saved up before making such an expensive purchase.”
Don’t settle for less.
There are many different types of financial advisors, which is why it pays to know how they are compensated. Start by asking advisors if they are fiduciary or not. Discuss getting unbiased advice from a team of fiduciary professionals who are here to help you develop your financial freedom so you can enjoy peace of mind.