When people come to us for financial advice, and particularly retirement planning, they have a very important question to ask: how do financial advisors get paid? You’re entrusting an advisor with your money, and you have a right to know how that person’s fees are structured.
A client might like everything we’re talking about, but they almost always ask how we’re getting paid.
We think it’s very important to know how an advisor is paid because it’s your money being invested. There are three traditional ways that financial experts may be paid:
3 Ways a Financial Advisor Can Be Paid
Commission-based payments have been around the longest, and there’s always some controversy here. Let’s say that an advisor recommends purchasing 100 stocks in Microsoft. He or she may be paid a commission on this purchase.
When someone handles your money, they may be paid commissions, which some clients aren’t happy about.
There are a lot of people that assume commission-based is bad because the advisor:
- Is incentivized to sell you a product
- Puts their interest first
But this isn’t always the case. There are a lot of good products that are commissionable. In some cases, products are always commissionable. Life insurance, for example, is commissionable, and the insurer pays an advisor commission because they recommend the product.
There are times when an advisor can’t get away from the commission, but this doesn’t mean that the product is bad by any means.
An annuity, which pays out money in disbursements, is one that needs servicing. Since the advisor is servicing the annuity, the insurer will pay them a commission because servicing can last 10 years or more.
An advisor may receive a commission:
- Once per buy-in and/or
- Once per year, etc.
Mutual funds are another product where there are three different types:
- A Shares
- B Shares
- C Shares
A shares are commissionable and provide an advisor with a certain percentage upfront. B shares don’t have upfront costs, but when you sell the shares, a charge is made and goes to the advisor.
There are also some mutual funds that pay a small commission to the advisor annually.
Real estate investment trusts (REITs) also have commission attached to them. An advisor may be paid with an REIT in many ways:
- Commission, which is most common. The advisor is paid by the REIT, but you’ll be required to keep the money in the trust for a specified period of time.
- There are some REITs that don’t pay commission in the same way, which we’ll be talking about in the next sections.
It’s best to ask your advisor if they receive commission. Advisors may also have the option to waive a commission. For example, an A share commission can be waived.
Note: In the financial industry, the commissions are highly regulated. The financial advisor working on your retirement planning can’t do much in terms of changing the commission due to the strict regulation on these products.
Fee-only advisors can help you with retirement planning, and this classification means that the advisor cannot help you with a product that gives commission. For example, let’s assume that an advisor is looking through your retirement plan and thinks life insurance would be an amazing option for you.
As an advisor that offers fee-only services, it is required that refer you to someone else for this product because they cannot receive a commission on it.
This is a very restrictive space.
Fees can be:
- Hourly fees
- Flat rate
- Asset-based (percentage of the funds or estate managed)
Asset-based fees are often preferred because as your estate or portfolio grows, the advisor is paid more. This type of fee structure makes sense for a lot of people because it’s in the best interest of the advisor to maximize your returns so that they’re paid more.
A fee-based advisor allows the individual to offer both commission and fee-only services, which offers the financial planner the most flexibility. If one of these financial professionals thinks that you may need life insurance, they can offer you this without needing to refer you to someone else.
In the broad spectrum, fee-based makes sense because the advisor can do everything for you.
But we recommend working with someone who is a fiduciary.
A fiduciary is held to the highest standard. As a fiduciary ourselves, this means that we must take care of the client first. As a client, this provides you with the most protection.
When speaking to a financial planner who is fee-only or fee-based, any time that there’s a conflict of interest, such as a commission being paid for a product recommendation, it must be disclosed.
We work on a fee-based arrangement, and when we make a recommendation that has a commission, we have to disclose everything to the client.
Ultimately, commissions are built into rates, so there’s always some payment coming from the client. We believe as long as the advisor is upfront and you know all of the fees and/or commissions upfront, commissions are perfectly fine.
If you want more information about preparing your finances for the future or retirement, check out our complimentary Master Class, ‘3 Steps to Secure Your Retirement’.
In this class, we teach you the steps you need to take to secure your dream retirement. Get the complimentary Master Class here.