Content of the material
- How do financial advisors get paid?
- How Do I Find a Fee-Only Financial Advisor?
- How Do I Know if Their Fee Is Reasonable?
- TJ van Gerven, CFP®
- What Does a Fee-Only Financial Advisor Cost?
- Paying a Financial Planner
- Match what you pay to services you receive
- Danielle Miura, CFP®
- Financial Advisor Fee Structures: Fee-Only vs. Fee-Based
- Get access to free financial tools
- Dually registered or a hybrid advisor:
- Fee-Only Vs. Fee-Based
- In conclusion:
How do financial advisors get paid?June 23rd, 2021
Canadian financial advisors provide their skills and expertise to serve our financial planning needs by recommending and providing solutions for our specific situation. How financial advisors are paid has become more transparent over the years. This helps us, as consumers, understand how the professionals providing their financial expertise will be compensated.
According to the Canadian government, a financial advisor is: “anybody who helps you manage your money. This could include an employee of your financial institution, a stock broker or an insurance agent.”
In Canada, there are four main ways financial advisors are paid: client fees, commissions, salary and bonuses. In most cases, advisors are compensated in combination of these ways. Let’s take a closer look at each of these in turn:
Client fees – This method of payment is when the client pays the advisor for their services either directly (fee-only) or indirectly (fee-based). Fee-only is usually for financial planners like a Certified Financial Planer (CFP). A CFP may charge a flat fee or a one-time fee to create a financial plan or provide a second opinion about an existing financial plan, for example. These individuals are transparent about what their fees are for, how you will be invoiced and what you will receive in return – advice, recommendations, time and so on.
Most Canadian financial advisors, who collect client fees, fall more in the fee-based category. This means they are paid with a small amount of your investment, usually referred to as a management expense ratio (MER). An MER is contained within the total built in cost of owning a mutual fund. It is important to note you do not pay the MER directly; rather it is paid by the fund itself, which reduces the value of your investment accordingly. The MER is taken out of the fund before the performance is calculated and usually ranges from 1 to 2.5%.
Alternatively, advisors can also use F-class mutual funds that don’t charge MERs, or they can purchase stocks and bonds directly and not charge a commission. In these situations, advisors can charge their own management fee, which they set after a conversation with a client. This fee is also a percentage of assets under management (i.e., 1.2% for F-class and 1.5%-2% for a stock/bond portfolio) and, like an MER, is paid directly by the fund.
Commissions – This type of compensation makes up the largest portion of how a financial advisor is paid. Financial advisors are paid commissions based on the solutions provided to their clients. The commissions take on a few different forms: upfront fees and transaction commissions. Upfront fees are commonly found in mutual funds where a percentage is paid to the advisor for each investment made into a mutual fund. Transaction commissions are more common for stock-based investments and are usually a flat fee rather than a percentage. Example of a transaction requiring a fee is selling or buying stock on your behalf.
Salary – Financial advisors may work at a financial institution, like a bank, and be paid a fixed salary for the work they do. This is especially true for newer financial advisors who are still building their client base. Typically, even if an advisor is paid a salary, they still may also earn client fees, commissions and bonuses. For many financial advisors they may have a ‘base’ salary and the bulk of their income is derived from a combination of the three other sources of income covered in this blog.
Bonuses – Being a financial advisor is a performance-based profession. As with many performance-based professions, financial advisors have the opportunity to earn additional income, like a bonus, if certain criteria are met. Criteria are specific to each organization. Some examples of financial advisor bonus criteria are hitting sales targets for new investments; adding new clients to their business; achieving team goals and recruiting new team members.
Financial advisors provide a great service to their clients and should be fairly compensated for the work they do and clients have a right to know and understand how this happens. Transparency around compensation fosters trust and open communication, both of which are must haves in any successful client/advisor relationship. Intent Planning advisors are paid based on a combination of the above methods, depending on the solution best suited to each client.
If you would like to talk to your advisor about how they are paid, in connection with your portfolio, please connect with us.
How Do I Find a Fee-Only Financial Advisor?
Aside from asking around, you can zero in on a fee-only financial advisor by going to organizations that specialize in the same field. The National Association of Personal Financial Advisors (NAPFA) and The Garrett Planning Network both have searchable directories on their websites.
Other, more general advisor organizations offer a good place to start. For example, the Financial Planning Association (FPA) has a database of financial planners that you can search according to location. On their website, you can easily filter the list to highlight fee-only planners—compensation is indicated in their profiles.
How Do I Know if Their Fee Is Reasonable?
You can feel confident that you’re paying your financial advisor a reasonable fee if it falls within the average price of the market. Of course, knowing this amount can be a challenge because the range you pay will be based on your location, your investment amount, and the complexity of your financial plan.
Here’s an average breakdown of what those costs could look like for each of the ways advisors are paid:
- Commission: The average commission is based on a percentage of your investment in a fund, which falls between 3–6%.
- Hourly fee: The average hourly financial planner fee ranges between $120–300.
- Flat fee: The annual flat fee for a financial plan can be as low as $500 to more than $10,000, depending on your net worth, where you live, the services you’re using, and how many assets your advisor is managing for you.
- Retainer fee: The average annual financial planning retainer is between $6,000–11,000 or a percentage of the assets under management with your advisor, usually somewhere between 0.5–2%.1
Investing fees are confusing, so a good advisor will understand if you have questions. They should be happy to clarify any confusion. That way, you understand what you’re paying for and what you’re getting for it. You should never put up with an "advisor" who can’t or won’t answer your questions. And never work with anyone who loses their patience with you.
TJ van Gerven, CFP®
Q: Why should I consider hiring a financial advisor with flat fee pricing?
TJ: While no type of fee model is perfect, the flat fee model is one of the most transparent and fair advisor-client compensation methods. It helps to remove the conflict of interest of “looking to gather your assets,” as well as a variety of conflicts around paying down debt vs. investing. With a flat fee model, you always know what you’re paying and what you’re paying for. It also allows you to work with an advisor regardless of your assets.
Q: Is there a scenario when a flat fee arrangement may not make sense for me?
TJ: A flat fee model may not make sense for you if you’re looking for a one-off engagement. In that case, you may be better served by an hourly advisor.
View TJ’s Profile on Wealthtender
What Does a Fee-Only Financial Advisor Cost?
A fee-only financial advisor's costs can range greatly, depending on their expertise and years of experience, their region, and the services they offer. A flat fee of $1,500 to $3,000 is typical for the original creation of a comprehensive financial plan. Timed or retainer rates can run between $150 to $400 an hour and between $1,000 to $7,500 annually. Those taking a percentage of assets they manage charge on a sliding scale, generally between 1%-2% annually.
Another common compensation approach is a combination of commissions and direct fees. In this instance, your advisor may still collect a commission on some products but is also providing advice for a direct fee. Advisors who operate under this business model often refer to themselves as “fee-based” advisors.
If your advisor is registered as a broker-dealer, a hybrid approach of both commissions and fee-based is common.
Paying a Financial Planner
While a financial planner helps clients make and save money, one may wonder where and how they get paid?
Financial planners make their income and revenue one of two ways, through commission or set fees.
When a financial planner makes their earnings through commission, if one makes money, they too earn money. Financial planners paid through commission can make commission either through fees or through a percentage of the returns for their clients.
Depending on the financial plan that the client has, the commission is going to vary; for example, there are transaction commissions, which are typical for financial planners who deal with investments based on the stock market.
With a commission-based income, the financial planner may earn more or less depending on their clients' performance of their investments.
As a financial planner who earns a salary, this typically means that they work for a bank or company that can provide financial stability and compensation. The misconception with a salary is that this is the only source of income for the financial planner; however, depending on the financial institution and the type of investments the planner deals with, they may be eligible for commission and or bonuses.
Bonuses are something that a financial planner can receive regardless of commission or salary based as much of the work of a financial planner is heavily set on performance; therefore, if they perform well, they are rewarded for it.
Match what you pay to services you receive
In the world of retailers, there are stores like Tiffany & Co. and there are others like Kay Jewelers.
"Both are very good companies, but they serve a different part of the marketplace," Jenkin said.
Likewise, you may pay more to work with a certain financial advisor based on their education, experience, expertise and various designations.
While one may charge $800 per hour, another may set their rate at $200 per hour.
"The reality is you need to determine the results and the value that they bring you," Jenkin said.
The most important question to keep in mind, Levine said, is "How can you help me solve my problem?"
"At the end of the day, I will gladly pay someone more if I'm going to get a good answer," Levine said.
Danielle Miura, CFP®
Q: Should I hire an advice-only financial advisor or a traditional advisor who will manage investments on my behalf?
Danielle: “Advice-Only firms ensure transparency of compensation and minimize conflicts of interest. At Spark Financials, we provide financial advice to empower our clients to be self-reliant and visualize their financial future. We are the navigator and our clients are the driver.
Our firm is set up to not hold or have access to our client’s assets, therefore our clients are protected from hidden fees. When a financial advisor manages assets, many clients are not able to see the direct impact of fees taken out of their accounts over time.
We also do not refer clients to someone that can manage their assets, hence preventing any kickback or markup compensation. We minimize conflicts of interest and fees for our clients so they can reach their goals faster and safer. Instead of managing our clients’ assets to make them rely on us, we educate our clients so they can eventually be independent. Our goal is to be as transparent as possible; this means no commission and no hidden fees.”
View Danielle’s Profile on Wealthtender
Financial Advisor Fee Structures: Fee-Only vs. Fee-Based
A firm’s sources of income determine whether they are considered a fee-only or fee-based advisory. Here’s a brief breakdown of each:
- Fee-only financial advisors: These advisors don’t charge commissions. Instead, their sole source of income is client fees for the services they provide. Again, this potentially includes both percentage-based management fees and flat or hourly financial planning fees.
- Fee-based financial advisors: By contrast, these advisors earn revenue from a combination of client fees and commissions. They charge fees to you directly for managing your assets or providing financial planning, while also earning some commissions on the side. These commissions are usually in relation to securities or insurance sales.
Commissions represent a potential conflict of interest. In short, they incentivize your advisor to recommend certain transactions and products. And you want to make sure your needs inform the advice you receive, meaning their potential commissions don’t factor into things. With this in mind, some experts recommend only using a fee-only advisor.
One important thing to note when comparing fee-only and fee-based advisors has to do with whether or not your advisor is held to a fiduciary standard. A fiduciary is held to a higher ethical standard and is required to act in your best interests at all times. Any registered investment advisor (RIA) holds this standard as part of their registration with the SEC. This standard might be a mitigating factor when considering a fee-based advisor; while such an advisor has an incentive to recommend certain transactions, those transactions must still be in your best interests.
Get access to free financial tools
- See all your money, all in one place.
- Stay on track with our Retirement Planner.
- Get up to date with our Investment Checkup.
Dually registered or a hybrid advisor:
Next, let’s look at advisors that are dually registered or hybrid advisor. There are some nuances between to a hybrid/dual-registered advisor. For the purposes of this discussion let’s focus on the fact that they are registered investment advisors AND licensed through FINRA (again, a private corporation that acts as a self-regulatory organization).
While that sounds good on the surface there are issues with this format. As a registered investment advisor, they act as fiduciaries and do what is in the best interest of the clients. Great news, but they are also filing with FINRA to sell products as a broker. What? Yes, they can sell investment products and collect a commission.
These advisors can wear two hats with the same client. Not a good look. They can have accounts which they are acting as fiduciaries on and then have another account with the same client in which they act as brokers and only follow the suitably standard.
In a recent research paper published by Nicole Boyson, professor of finance at Northeastern University, The Worst of Both Worlds? Dual-Registered Investment Advisers, she finds dual registrants “have numerous conflicts of interest.” These include cross-selling insurance products, revenue sharing with third-party mutual fund companies, and selling proprietary investment products. She also found dual registrants charge an average of 2.1% on assets under management. This is much higher than the 1% fee most registered investment advisers collect. On top of that, they are more likely to be the subject of disciplinary actions by securities regulators.
How can someone be a fiduciary to a client but not on all their accounts or money? I am still scratching my head on this one. In my opinion, a client would never really know if the recommendations were in their best interest or not! This model was a pass for Bonfire.
Fee-Only Vs. Fee-Based
Another thing to consider in determining how financial advisors are paid is whether they are Fee-Only or Fee-Based. While the term Fee-Based may sound very similar to Fee-Only, there are important distinctions.
The Fee-Based model can be susceptible to the same conflicts of interest that the commission structure has. There are many advisors who are mostly fee-based and the majority of their revenues come from fees, yet they can offer you a mutual fund or an investment that normally has a commission, and a conflict.
Fee-Only advisors don’t sell products, don’t accept commissions and they operate as true fiduciaries. Fee-only advisors work for their clients and clients pay an hourly rate, a fixed annual retainer or a percentage of the investment assets.
I have always strived to be upfront and honest with people and my clients. At a young age, I started my career at a big wire-house and believed I was a fiduciary for my clients and that I could act in their best interest. However, the more I was learning, the more I began to realize the cards were against me. Decisions made at the top made it difficult to truly act in the manner of a fiduciary. I was a vegan in a butcher shop, a sheep in wolf’s clothing.
So, I made a switch and I started Bonfire Financial, a Fee-Only Registered Investment Advisor. Now my core values are in line with the company I am with and I can be a true fiduciary all the time.
If you have any other questions on how Financial Advisors get paid, or if you are curious what category your advisor falls in, feel free to give us a call.