What are the different ways an advisor can be compensated?
There are several methods by which advisors are typically paid:
- Commissions. The advisor is compensated for the sale of investments, insurance and other financial products. The firm that provides the financial product, usually a mutual fund or an insurance company, pays the compensation. This may be in the form of an up-front charge, trailing (ongoing) fees, or a combination of both.
- Fee-based (Flat Fee). Typically, the advisor will charge a fee for putting together a financial plan for an individual client. If the client chooses to implement financial plan recommendations like the purchase of insurance, an annuity, or investments, the advisor may also be compensated via the sale of commissioned products.
- Fee-only (Percentage of Assets). The advisor charges a fee that is paid by the client or by an ERISA reimbursable account. The advisor’s fee is totally independent of any financial products and can be one-time or ongoing depending on the nature of the relationship and the services rendered. Fees may be hourly, flat or retainer-based, or based upon a percentage of the assets under advisement. The percent of the fee typically decreases as the assets grow.
- Spread-Based Commission. Some types of advisors and financial institutions may charge a commission based on the “spread” of a transaction. The “spread” may have different technical meanings depending on the type of transaction or investment, but generally refers to amounts retained by a financial institution in connection with the transaction. For example, spread could mean the difference between a “bid” price and an “ask” price such as in a foreign exchange transaction, or the retained investment gains on assets above those owed to the investor.