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How Do Financial Advisors Make Money?

Posted January 22, 2023

In this highlight, we discuss how financial advisors make their money and give some insight into frequently asked questions that we receive.
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. To learn more about our Abound Wealth, click here.

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