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How Do Financial Advisors Make Money?

January 22, 2023

Transcript

When it comes to hiring a financial advisor, there are two main business models to consider: commission-based and fee-only.

Commission-based advisors, such as life insurance agents and brokers, earn a commission for every dollar invested by a client. This commission can be quite significant, with first-year premiums for life insurance policies often being the bulk of the commission earned. Mutual fund companies also often have commission rates of around 3-5%.

On the other hand, fee-only advisors charge a fee for their services, usually around 1% of assets under management per year. This fee covers everything from investment advice to financial planning and portfolio management. Fee-only advisors may also offer hourly or subscription-based models.

It’s worth noting that the fee-only model is relatively rare in the financial industry. Only 2.5-3% of financial advisors are fee-only, with the other 97% of the industry having some form of sales or commission component.

A fee-based model allows people to keep a close eye on their clients’ financial situations and make adjustments as necessary. The financial world is constantly changing and a one-time plan may not be suitable for a client’s needs in the future.

In summary, when considering hiring a financial advisor, it’s important to understand the difference between commission-based and fee-only business models, and to weigh the pros and cons of each before making a decision. Ultimately, the best choice will depend on the individual’s specific financial needs and goals.

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