While compensation is necessary when choosing a financial advisor, it’s not the only factor to consider. At our firm, we believe that excellent and trustworthy professionals can be found across all compensation structures in the financial industry. However, we believe it’s easier for advisors to recommend the best solutions for their clients when their compensation aligns with their client’s best interests.
While commission products can offer viable solutions, we do have some concerns with the fee structure. In particular, we don’t like that the fees associated with these products are often complicated and can be left off statements, leading some clients to believe they’ve received free financial advice mistakenly.
It’s important to understand the different types of fees that financial advisors and financial companies can charge.
Compensation Models
- Fee-only advisor fees: These advisors can only be paid by you, as they work exclusively for you. Their compensation can take the form of a flat fee, ongoing retainer, or a percentage of your Assets Under Management.
- Fee-based advisor fees: These professionals can receive compensation from multiple sources, including an agreed-upon percentage of your Assets Under Management, flat financial planning fees, and commissions for financial products they sell.
- Commission fees: A significant portion of the industry still operates on a commission-based structure, with advisors receiving compensation every time you purchase a new mutual fund, insurance policy, or annuity.
- Transaction charges: Custodians that house your investment assets will typically charge two types of fees: a small percentage-based custodial fee, and a transaction fee for sales and purchases of individual investment products.
- Fund management fees: Your portfolio likely contains mutual funds, exchange-traded funds, or index funds, which are products offered by Investment Fund companies. These fees can vary widely, with actively-managed funds typically having higher fees than passively-managed ones. It’s important to note that some fees may be withdrawn before asset values are calculated for quarterly statements, and there may be large fees or penalties associated with buying or selling funds that you haven’t owned for a specific period of time.