Understanding How Financial Advisors Make Money

Understanding How Financial Advisors Make MoneyGetting your finances in order is one of the most important things that you can do, and many people in this situation turned to a financial advisor for help in this area. Working with a financial advisor can be a wise move, but it can also be expensive. Before you hire any financial advisor, it is a good idea to understand exactly how he gets paid first. There are a number of different ways that financial advisors can charge you for their services.

Commission

One of the most basic ways that financial advisors get paid is by charging you a commission. With this type a financial advisor, you will be charged every time you make a purchase of a security. The advisor gets a percentage of the transaction or a flat fee for every transaction. If you trade securities frequently, the commissions can really start to add up. If you are a more long-term investor, this might be the best way to go because you won’t be trading securities that often.

Commission Plus Fees

Some financial advisors get commission plus fees for their services. They get commission on certain products that they sell you, and then they also charge you fees for some of the services that they render. If they help you come up with a financial plan or budget, they’ll charge you a fee for this service. Then when you buy some of the securities that they recommend, you’ll pay them a commission for this as well. When working with this type of financial advisor, it is important to make sure that you know what services they charge fees for, so that you can minimize them.

Salary and Bonus Compensation

In a few instances, companies will pay their advisors a salary and add bonuses for performance. With this scenario, the advisor gets a flat salary every year, and then gets some kind of a bonus for bringing in new customers or selling securities. If you can find this type of broker, you may be able to save some money if you need a lot of advice or help with certain processes. You may not have to pay on a per-item basis like you would with a financial advisor who charges fees.

Fee-Only Advisors

Some financial advisers only charge fees for the services that they provide. They don’t get a commission for any of the recommendations that they make, and they don’t get any kind of bonus for selling you more securities. The nice thing about working with this type of advisor is that they can give you unbiased advice about investments. They just want you to make money, so that you will continue to be a customer. They are not pushing specific types of investments only because they get a commission on them. This ensures that you get the best advice when choosing investments. The downside to using this type of advisor is that they can nickel and dime you for all of the services that they provide.

Types of Fees

If you work with a financial advisor who charges fees, there are a number of different ways that you could be charged. For example, some financial advisers charge based on an hourly fee. They keep track of how much time they spend working with you, and then they charge you based on that amount of time. Depending on the hourly rate that you are being charged, this could be a good or bad deal.

Another way that financial advisers could charge is based on a flat-fee model. With this approach, they simply charge you one fee for a package of services. For instance, they might help you create a budget, a long-term financial plan, and make investment recommendations for one price.

Some financial advisors will try to get you to pay a retainer fee. This type of fee is usually a percentage of the total amount of your portfolio or investment holdings.

Depending on your situation, one of these methods of composition may be better for you than some of the others. Look at your situation, and then try to calculate which method would save you the most money and make the most sense for you.