How Do Financial Professionals Get Paid? And other things you need to know

The world of financial advice is littered with puzzling industry jargon and conflicting information about what is “best”. How are you supposed to begin getting your financial life in order if the language used to talk about even hiring a financial advisor is confusing? To help you wade through the massive amount of information out there, you can reference this guide to help you with some of the more technical aspects for hiring a financial planner. Personality fit, price for advice, and many other factors can weigh in too, but for this article I’ll be sticking to the technical parts.

How do Financial Professionals Get Paid?

There is a LOT of confusing information about how financial professionals get paid. When you are selecting the right advisor for you, knowing how they will be compensated is critical. Being well informed about where your advisors interests are aligned (and if they are putting your interests first) can help you weigh the advice you are being given with open eyes. Let’s take a look at some of the most common ways financial professionals can be compensated for their time and expertise.

Fee for Advice
When a financial advisor charges a fee for advice, they are charging a specific, agreed in advance fee for the advice they are providing to you. This fee is not usually tied to the size of your investments, but it can vary based on the complexity of your individual situation. While you will have to pay for this type of service as a direct expense on your budget, it is a great way to help ensure that the advice you are being given is free of direct financial incentive for the planner.

This is very similar to a fee for advice form of billing. The primary difference is that you will be charged based on the amount of time your advisor is working with you and on your plan. Most advisors who use hourly billing charge a minimum number of hours and prorate the fee to the nearest 15 minute increment.

Assets Under Management (AUM)
Under this billing method, an advisor charges a percentage of the value of your investment portfolio. This is typically an annual rate that is billed directly to your investment account quarterly. For example, if you have $100,000 invested with an advisor that has an AUM fee of 1%, you would be paying $1,000 annually. If this is billed quarterly, your investment account would be charged $250 once per quarter.

Commissions are when an Advisor receives a direct incentive for selling a product to a client. This is common in most insurance or annuity products, certain mutual funds, and individual transactions for non-AUM accounts. If you have not signed an agreement for fee for advice, hourly planning, or AUM, it is likely that your financial professional is earning their revenue through commissions paid to the advisor by a third party on the products they sell to you.

Some large financial firms hire financial advisors to work on their staff as a part of the service they provide to their clients. These advisors will likely be limited in the advice they can give. They often serve hundreds (potentially thousands) of clients, making the depth of their attention per client naturally limited. They are also limited to only giving advice on the accounts you hold with their employer.

So, now that you understand the most common ways financial professionals are paid, lets talk about some frequently used terms you might see financial advisors use to advertise their services.

The Difference in “Fee-Only” and “Fee-Based” Advice

Fee – Only
Fee only financial planners are paid directly by their clients for the work they do. They may be paid as a flat fee, hourly fee, or with AUM fees, but the compensation only comes directly from their clients. A Fee-only advisor will not receive commissions from selling specific products to their clients. This can help prevent bias on the part of the advisor to recommend specific products linked to higher paying commissions.

Fee- Based
Fee- Based financial advisors receive their compensation either from commission for selling products or directly from their clients. It is possible for a fee-based advisor to be compensated with a mix of commission from sales and fees directly from the client.

Other Widely Used Terms

This word has become a real buzzword in the world of financial advice, and for a good reason. A financial planner that is a fiduciary means they have the obligation to put their clients best interests before their own. A great example I run into often is when an advisor has a client who is being charged via AUM fees who also wants to pay off their primary home. It is in the advisors financial interest to keep the money under AUM, for higher compensation to the advisor. Whether or not to pay of their home early could have MANY contributing factors in either direction for the client. A fiduciary advisor would not factor in their own compensation when helping the client make this decision.
Advisors who are not fiduciaries are not held to this standard of ethics. Non – fiduciary advisors are required to provide investment advice they believe to be reasonably suitable to the customer. Suitability leaves a lot of room for interpretation and does not necessarily mean the advice given has to be the best advice to the client.
I find it easiest to think of it this way: One scoop of ice-cream is a suitable dessert. One scoop of ice-cream atop a molten lava cake with a generous drizzle of warm caramel sauce? Now THAT’s considered in my best interest. Maybe you prefer fruit? Everyone’s needs are different.

Industry designations can be really confusing at best and misleading at worst. Just because a financial planner has some fancy looking alphabet soup behind their name does not necessarily mean they have a good background or education in financial planning. Make sure to do your research on what those letters represent. The planner you are investigating may have a designation that suits you very well! Or their designations could be relatively meaningless. There are dozens of designations that financial advisors can use, but only a few are certified by an independent third party agency. A list of Accredited Designations can be found here:
Since there are so many certifications, I couldn’t possibly cover them all in one article. In general, for a place to start, the designation for a CERTIFIED FINANCIAL PLANNER, or CFP®, is widely recognized as a respectable, rigorous program for Financial Planners who provide comprehensive, personal financial advice.

How do you fall into those categories?

I am a Fee – Only Fiduciary Financial Planner. My compensation only comes directly from the clients I serve. I do not sell insurance products or annuities, and I do not receive commissions from any of the products I recommend. I hold CFP® and CRC ® designations, which are both accredited as per the link above. I offer Fee for Advice and AUM for my current clients. I also offer hourly services, but I highly recommend and believe most people benefit from a comprehensive financial plan.

If you believe that my services would meet your current needs, I would love the chance to speak with you. Please schedule a complimentary 30 minute consultation so that we can determine if we would like to work together. I look forward to seeing you soon!