The services of a good financial advisor certainly aren’t free, but do you know how your advisor gets paid? After all, they have to make their money somewhere. Financial advisors can be paid in a variety of complex ways, and we’ve broken them down for you here.
Most people know that financial advisors have to get paid somehow, but few can tell you exactly how—and even fewer know how they’re paying their own financial advisor. Financial advisors commonly use 1 of 4 compensation models to get paid: commission, fee-based, fee-only, and salary plus bonuses. If you’re already working with a financial advisor or even if you’re just considering working with one for the first time, be sure you understand how the advisor is paid. It’s important to note that, with the new Department of Labor rules on fiduciaries, advisor business models and how advisors get paid are in flux and are almost certain to change.
Financial advisors aren’t always the most upfront about how exactly they’re getting paid or what they’re charging for their services. If you’re paying a hefty sum to your financial advisor, don’t you want to know exactly where your hard-earned cash is going?
Too many people are loyal clients for no good reason, offering up their trust to their financial advisors blindly. Many will refer to their advisors as “great friends” or say that they stay with an advisor for other superficial reasons. These kinds of clients often aren’t getting all they can out of their relationship with their advisor; in fact, they’re probably losing money.
If you pay much attention to the news, you’ve likely seen reports about people paying big bucks to financial advisors for portfolio fees they didn’t even know existed. Everyone knows that his or her advisor has to be making money somewhere along the line. Nothing is free, especially not the services of a good financial advisor. So how exactly do financial advisors get paid and why does it matter to you?
Financial advisors are responsible for helping their clients make good financial decisions, including investment decisions. Though many Americans believe they are informed about investing, most still rely heavily on the knowledge and advice of their financial advisors when making important decisions.
Who’s giving you financial advice? Do you really understand the type of financial advisor that you have? Do you know how he gets paid? It might not seem significant, but it can make quite a difference in the quality of the advice and the service you receive. Not every advisor will have your best interest at heart. Understanding the different types of financial advisors can be very confusing, but it’s important to untangle the concepts to ensure that you’re hiring the right type of advisor for your needs because not all financial advisors are created equally.