One of the most popular career choices in financial services today is that of financial advisor. A financial advisor plays a crucial role in helping investors achieve their goals such as saving for retirement, funding their children’s education, or buying a home.
But how do they get paid?
There are several compensation models available in the industry. We’ll explore them here.
Typically, advisors who work for financial institutions such as a bank, credit union, or trust company, are paid an annual salary. They may also qualify for a bonus if they meet or exceed their sales targets. These advisors help to service existing clients of the financial institution but are also focused on growing the customer base.
Advisors who are compensated in a commission-based structure are remunerated when their clients buy or sell an investment. If we look at a mutual fund, the commission charged is typically a percentage of the money invested. In addition, mutual fund companies can continue to pay advisors an ongoing amount if their clients continue to hold the mutual fund. This is known as a trailer fee. Commission-based is the most common compensation structure for those financial advisors working for dealers and brokerages.
Fee-based advisors charge clients directly for their services. This can be based on the value of assets the advisor manages (asset-based) or it can be a flat fee or an hourly rate (fee-only).
Most asset-based fee advisors work for dealers or brokerages and are registered to sell securities. Along with providing investment advice, they can invest their client’s money for them. Clients usually pay a percentage of the assets under management as their fee.
Fee-only advisors do not always hold a securities registration. They usually focus on financial planning type services which can include activities for clients such as creating a financial plan, preparing for a career transition, minimizing tax liability, succession planning for a business or organizing a charitable gift or bequest.
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