There are two main payment structures for advisors, fee-only and commission-based. There's also a third category, fee-based, that's a bit of a hybrid of the first two. Which is right for you?
For the most part, financial advisors don't work for free. If you are seeking investment help or want someone to help you lay out a financial plan, you are going to have to pay that person. How you pay your advisor depends on the type of fee structure he or she works under. There are two main payment structures for advisors, fee-only and commission-based. There's also a third category, fee-based, that's a bit of a hybrid of the first two.
So, which one is best? It all depends on what you want to get from your advisor.
Fee-Only
If you work with a fee-only financial advisor, the amount he or she charges for services doesn't have anything to do with what stocks or bonds you purchase or how well your assets perform. Instead, the advisor charges one rate. It can be an hourly rate, so that you only pay the advisor for the time he or she works. Another option is to charge a flat fee for services, such as $500 a month or $2,000 per year. The fee you pay could also be on a sliding scale, based on your total income.
A financial advisor who works on a fee-only basis is most likely to be a member of the National Association of Personal Financial Advisors (NAPFA). To become a member of NAPFA, an advisor needs to sign a fiduciary oath and agree to uphold a code of ethics. Members of the NAPFA can only work on a fee-only basis.
Commission-Based
A financial advisor who uses a commission-based fee structure gets a cut of whatever stocks or assets you purchase, whether those assets perform well and end up making money for you, or not. For example, an advisor working on commission might get 1% of the sale price when you purchase a particular mutual fund.
Fee-Based
An advisor who is fee-based might charge you a flat fee or an hourly fee for the advice and services he or she gives, and can earn a commission on the products you purchase. If the advisor manages some or all of your assets, he or she might also earn a percentage of the annual yield of those assets.
What It Means for You
Understanding how your advisor gets paid doesn't just help you keep an eye on your wallet and spending. It can also influence the recommendations he or she makes to you. For example, when an advisor works on a fee-only basis, you're going to pay the flat or hourly rate, no matter what. The advisor has a greater incentive, and a responsibility to you, as the client, to only recommend stocks, mutual funds or other financial moves that he or she thinks will provide the greatest benefit to you.
When an advisor works on a commission basis, the lines between what's best for you and what will best boost the advisor's income can become blurred. If your advisor will get a 5% cut when you purchase a certain stock, he or she might be more likely to recommend that stock, even if the company behind it isn't doing so well and even if you're likely to lose money on the investment.
Find out how a financial advisor gets paid, before you agree to work with him or her. Doing so can mean the difference between someone who's working for you and someone who's working for a paycheck.
Flagler is a not-for-profit financial cooperative whose mission is enriching people’s lives… members, employees, community. Unlike other financial institutions, credit union ‘profits’ are returned to the membership in the form of lower loan rates, higher dividend rates, and affordable services.
