How Investment Advisors and Financial Planners Get Paid
The most expensive advice is free advice. Although this statement is often delivered as a joke, there is much truth to it: Like everyone else, professional advisors and planners need to pay the bills and put food on the table at home. Therefore, even if the fees may not be coming directly out of your pocket, and even if you can’t see clearly how they’re getting paid, advisors are getting paid by you in some shape or form.
Here are the basic ways advisors get paid:
- Commissions: This type of payment is typical of full service brokers, which are the traditional “stock brokers.” A commission, which can range from $30 to $300 or more, is paid to the broker whenever they execute a trade (buy or sell shares of investments). The commission works like a fee added onto the client’s trade amount. For example, if the trade is to buy $10,000 in shares of a particular stock, and the commission is $100, the total trade that you bought is $10,100.
- Fees: Some advisors don’t get paid commissions but rather charge fees directly to the client based upon the services provided. Some advisors will charge fees based on assets under management (AUM) or they charge a one-time fixed fee for the type of service. For example, an advisor might charge a 1.00% AUM fee. If the client’s assets under management are $100,000, the annual fee would be $1,000. But if the client simply wants a one-time financial plan, the advisor will charge a fee that is disclosed in advance. For this type of service, a client may pay $500 to $5,000, depending upon the depth and complexity of the plan.
- Salary Plus Commission: Many advisors, usually those found at banks and insurance companies, get a base salary and they also get commissions or bonuses based upon the products they sell.
Types of Investment Advisors and Financial Planners
There are several different types of advisors with various titles, designations and certifications but here are the ones to know:
- Certified Financial Planners (CFP): A CFP® is an individual who has met all of the Certified Financial Planner Board of Standards’ requirements, which includes a minimum of experience and passing a comprehensive board exam. CFPs also have to complete continuing education requirements to maintain their CFP status. CFPs can have broad knowledge of all areas of financial planning, including investing, retirement, insurance, taxes, insurance, and estate planning. However the CFP designation does not guarantee that they are an expert in any certain area, although they typically specialize in one of the areas of financial planning. Generally, and at a minimum, the CFP designation indicates at least a high relative understanding of financial products.
- Registered Investment Advisers (RIAs): An RIA is a firm that is registered with a State regulatory body, such as the Securities division of the state’s Attorney General’s office, or the Securities Exchange Commission (SEC).An adviser (with an “er”) is a company and an advisor (with an “or”) is an individual, formally called an RIA rep.
- Stock Brokers: These advisors, usually referred to as “full service brokers” are representatives of a brokerage firm that is licensed to sell securities (i.e. stocks and bonds). These advisors typically get paid by commissions on the securities they sell. They are called “full service” because they (as well as the brokerage firm analysts) do all of the trading, advising, and analysis for the client. Commissions or fees coming from mutual funds commonly come from load funds and 12b-1 fees. Most do-it-yourself investors use “discount brokers,” such as Charles Schwab, which will not typically place the buy or sell orders but will execute the trades for a small commission, usually around $10. Discount brokers also provide access to no-load mutual funds.
- Insurance Agents and Bankers: I put these two types of advisors into the same category because they are neither investment advisors nor financial planners but they can be licensed to sell mutual funds, stocks, bonds, and/or variable annuities that can be used as investments. Insurance and Bankers can also provide financial planning services.
- source: wealthforum.com