A financial advisor can be a valuable asset in helping you make a wide variety of financial decisions. They can serve as a partner to their clients by providing valuable financial education and guidance to reach specific goals.
Financial advisors make money in three primary ways—through client fees, through commissions on financial transactions, and through advisory staff salary.
What does a financial advisor do?
Some people hire a financial advisor when dealing with a specific issue like saving college tuition for a child. However, financial advisors offer assistance in many areas including budgeting, saving, choosing the proper insurance coverage, mapping out tax strategies, investing, and preparing for retirement.
How do financial advisors make money?
Client fees are one way that financial advisors make money. The fees can be based on an hourly rate, a fixed fee amount, or on the total AUM (assets under management). So, a client might pay a flat fee of $2,000–$7,500 per year, an hourly fee of $200–$400 per hour, or a percentage of the money they entrust to the advisor.
NerdWallet states that for AUM fees, the percentage is usually between 0.25 percent and 0.5 percent annually for robo-advisors and 1 percent for in-person financial advisors. For a client with a 0.25 percent fee and $100,000 in assets managed, a financial advisor would earn $250 a year from that one client.
Financial advisors also earn money based on commissions from financial transactions, according to Yahoo Finance. The financial transactions can include selling financial products like mutual funds or annuities to a client. The amount the client spends or invests in that product returns a percentage to the financial advisor.
Third, financial advisors make money as salaried employees of a financial firm. The advisor is paid a flat annual salary for performing their job duties instead of charging clients fees or making commissions. There can also be incentives or bonuses for specific accomplishments that benefit the firm.
Fee-only versus fee-based advisors
Two key terms impact both clients and advisors. A fee-only advisor makes income solely from fees charged to clients, whether hourly, flat, or percentage-based fees. They earn money for client advice, plan implementation, and asset management.
Fee-based advisors are different in that they earn money on commissions as well as from client fees. A conflict of interest may exist here. Certain products yield better commissions for advisors than others, but this is an attractive payment option from the advisor’s perspective.
There are also commission-only advisors who only earn their income “from commissions on the investments bought and sold on your behalf,” according to NerdWallet.
What is a fiduciary standard?
A fiduciary standard is the general expectation of financial advisors to act in the best interests of their clients. They should put client needs above their own, according to The Balance. However, not all financial advisors are bound by the fiduciary standard.
Some financial advisors are only subject to a suitability standard rather than the fiduciary standard. Basically, advisor recommendations must be “suitable” for the client, but the guidelines are much less strict. Commission-based transactions are still usually permissible under suitability standards.