Do you know how financial advisors get paid?
Sometimes there is a mystery as to how and how much financial advisors get paid. Naturally, I believe advisors should get paid for the service they provide. However it is imperative that investors start asking more questions around compensation. There are three main types of advisors:
The majority of financial advisors are commission based. These advisors get compensated by selling products like mutual funds, stocks, GICs and insurance products. There are often two key concerns with commission-based advice. The first concern is whether you are getting good financial advice and planning as opposed to just buying financial products and the second concern is whether the amount of commission on different products affects the types of products being recommended.
There are a growing number of fee-based advisors who charge a fee for their services but the fee is still tied to the size of a portfolio. Usually the fee is expressed as a percentage of assets. For example, a fee-based advisor might charge 1% on the assets and as a result there would be no additional trading costs. The advantage with fee-based advice is it can account for clients with different portfolio sizes. For example someone with $1,000,000 might negotiate a lower fee than someone with $100,000. The fee is more transparent than the commission model but investors need to be aware that they might get charged the advisor fee and be paying another layer of fees and compensation from the products that are recommended. This is commonly known as double dipping and should be avoided at all costs. Because product is still being sold and managed, there is still a potential conflict of interest.
The rarest form of compensation is the fee-only model. This is where advisors do not sell products and only get compensated by charging for their time. Hourly rates can range from $75 per hour to $500 per hour depending on the experience and services. With fee-only planning there is usually less focus on product and more focus on planning and advice. The biggest challenge with fee-only advisors is they cannot help implement plans through financial products.
At the end of the day, there are good advisors and bad advisors no matter how the advisor is compensated. It is important that clients/investors ask questions about how and how much advisors get paid. You have the right to know!