I’ll admit it, I used to be one of those naïve individuals who believed that if I was paying a professional to do something that I couldn’t do myself, then they had to have my best interests at heart – no matter what. What a fool I’ve been. Sadly, the older I get, the more I realize that this isn’t the way the world works. Even though I’m paying for expert advice, there’s no guarantee that it’s always the best advice for me.
Take, for instance, financial advisors. One would think that their advice would be tailored to their client’s needs. Unfortunately, this is not always so. Knowing how your financial advisor gets paid, though, will give you a better idea of where their interests lie. Let’s take a closer look.
How do Financial Advisors Get Paid?
There are a number of different ways that financial advisors get paid. Some work for a salary, while others work on commission. Some charge fees for set packages or work by the hour. Many are paid in a combination of ways. Let’s take a closer look at each form of payment.
Some financial advisors collect a commission on the products they sell; products include investments, loans, insurance products and real estate investments. Often they collect front-end commissions, which is based on a percentage of the total transaction. So, for instance, if you buy $5000 worth of mutual funds and your financial advisor charges a rate of 1%, you will end up paying them $50 in commission. If they are paid through back-end commissions, there is no charge to you at all. You should know, though, that if you decide to withdraw your money early you could end up paying an added fee. Some financial advisors also charge ongoing trailer fees, or commissions paid by the investment itself.
Pros: If you have a small amount of money to play with, working with a financial advisor whose pay is commission based may be the way to go. Overall, it can be less expensive than paying a flat fee or hourly rate.
Cons: Regardless of whether or not the product is right for you, financial advisors who work on commission often sell products based on how much they’ll make. What this means is that you’ll never really know if the product is right for you, or if their recommendation is based on personal profit.
There are two ways that financial advisors charge fees – either by the hour or at a set rate for a specific package. The financial advisor you choose might put together a financial plan for you based on a set rate. Other financial advisors work on an hourly rate. Some offer pre-set packages for predetermined prices.
Pros: Since most people don’t need a comprehensive financial report or ongoing work, working with a financial advisor who receives fee-based pay can make more financial sense.
Cons: Although having a financial plan created or choosing a pre-set package is a good option for most, it can be pricey, especially if you don’t have a lot of money to play with in the first place.
Financial advisors who receive salaried pay don’t work for themselves, but for a company. Although they don’t receive a commission for the products they sell, they might be offered a bonus based on the number of specific products they sell.
Pros: Working with a salaried financial advisor often means that you don’t get biased recommendations.
Cons: Although the company your salaried financial advisor works for won’t pressure you to purchase specific products, their offerings might be limited. While they might not make a commission, they may receive bonuses for selling certain products.
So What Should You Do?
As Canadians, we tend to be shy about money, so the very idea of asking your financial advisor about their pay may irk you. If you think about it, though, you’re not asking them how much they make each year. You’re simply trying to get a feel for how they’ll handle your money – in a biased or unbiased fashion. If the financial advisor you work with is the right choice, they won’t have a problem with you asking them outright. If they squirm uncomfortably, then you have your answer. It’s your money; choose someone who will manage it as you would.