Decoding Financial Advisor Commission
Questions to Ask Your Personal Financial Advisor
What do financial advisors charge for their services?
When you work with a financial advisor, you deserve to know how they are paid for their services. When talking with your financial advisor about compensation, it’s useful to understand the three prevalent models in the industry.
- Some financial advisors earn a financial advisor commission on the investments they manage.
- Some financial advisors charge fees for services to their clients. Rates may be flat, hourly or a percentage of the overall investment portfolio.
- Some financial advisors charge a mix of both.
Each of these models has advantages. In this post, we’ll look at how financial advisor commission percentages are charged. (We cover fee-only financial planning in a related article.)
Understanding How Financial Advisor Commissions Work
When a financial advisor charges a commission, the payment is taken directly from the investor’s account. For example, if an investor purchased an investment for $100,000 with a front load commission of 5.5%, or $5,500. The investor is effectively investing $94,500.
Source of payment
Fees are taken directly from your investment account.
Timing of charge
Commission is charged:
- When the purchase is made (this is called front-loaded fees)
- When the investment is sold within a set timeframe (this is called contingent deferred sales charge)
- A combination
Motivations for a financial advisor commission-based practice
A financial advisor can earn income each time an investment is bought, sold or both. The income is not based on the performance of the investment.
Advantages for investors
Your account may have lower on-going expenses when fees are charged up-front.
A Closer Look at Financial Advisor Commission Percentages
Financial advisor commission watch points
Beware of good salespeople who may present themselves as personal financial advisors. They may be driven solely by a financial advisor commission payout and not helping their clients grow their wealth. For example, should the client buy $1 million worth of government bonds for which the planner makes a $500 commission, or should the money go into a different fund with a $10,000 commission to the planner?
Financial advisor commission percentages may also lock you into one type of investment out of reluctance to incur more commission fees when he or she switches to a different investment. Alternatively, a personal financial advisor may push investors to unwittingly trade more frequently to garner more commissions.
Questions to Ask about How Financial Advisors Charge
Whether you are trying to find a financial planner for the first-time or you simply want to better understand the fee structure for the one you are working with, here are some questions to ask:
o Am I charged fees, commissions or both for your services and the investments in my portfolio?
- If yes to fees: What is your fee structure and how often do you collect payment?
- If yes to commissions: Which stock purchases are front-load and which are deferred?
- For the deferred sales charge investments: What are the specific parameters for each vehicle? For example, if the stocks are sold within a certain number of years, what commission is paid? If the stock is held longer, at what point do the sales charges decline on a sliding scale, eventually to zero?
o Do you receive commissions on insurance products? If so, how is the commission paid?
o Where and how are these commissions recorded and communicated to me?
Understanding your financial advisor’s compensation model is one more way you can be sure that you are choosing a financial planner who can help you meet your long-term financial goals. For some investors that will be a fee-only financial planner. For others, financial planner commission models will make the most sense. By doing your homework and asking questions, you can be sure you find a financial planner who meets your needs.