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September 1, 2017How Are Financial Advisors Paid?
When you start searching for financial advisors, you likely heard the terms, fee-based, fee-only and commission based. These are simply three ways that financial professionals are paid. What does each of these terms mean and which is best for me? Today I’m clearing up the confusion!
Fee-only Advisors
First, let’s look at fee-only. Basically, you pay the advisor and not someone else. Perhaps you pay them to perform a service, like developing a financial plan for you. You could pay them hourly. If they manage assets for you, their pay is a percentage of those assets. Or maybe you just simply pay them a retainer fee. Fee-based advisors get their money directly from you the client.
Fee-based Advisors
Next, you have fee-based advisors. That’s a little more tricky. Sometimes their pay is fee-only and sometimes their pay is directly from a company. So when they sell a product, they receive a commission from the product. For example, if they sell a stock, they get a commission from that stock. Perhaps they sell you a variable life or annuity to you then they get a commission from the company. A fee-based person is in the middle, either fee-based or receiving a commission.
Commission-only Advisors
Finally, there are the commission only advisors. These advisors are paid only by the commissions they receive from the products they sell. They can’t charge fees at all because either they aren’t licensed, or they may not want to take the time to get the extra credentials. These professionals are typically insurance salespeople or some type of finance professional that deals with selling a product, not necessarily service based.
Which is Best?
Now is one better than the other? Views vary on the answer to that. Here’s what I want to drive home. If you work with a CERTIFIED FINANCIAL PLANNER™, rule 2.2 of the CFP® code says that all CFP® Professionals must provide an accurate and understandable description of their compensation. In other words, they must provide you the client with a full, detailed disclosure of how they are getting paid. That way you the consumer understands how much they are getting paid. I don’t really get involved in the argument of which type advisor you should hire based on their pay. My only caveat is that you work with a CERTIFIED FINANCIAL PLANNER™.
What’s Next?
Now that you know how advisors are paid, learn if they actually worth the fees they charge.