The financial advisory profession is forecasted to grow by 13 percent between 2022 and 2032. The median annual income for a financial advisor is just shy of six figures. This job outlook shows a ton of promise, but before you rush in, it’s important to understand how financial advisors make money.
This industry has many different sectors, each with its own compensation structures. For instance, you can work as an investment advisor at a large corporation, a broker-dealer firm representative, an insurance company agent, a professional at a financial services organization, or any combination of the above.
It can be complicated to understand how financial advisors earn money. To clear up any misconceptions, let’s examine three common payment structures.
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What Is a Financial Advisor?
Financial advisors assist clients in making decisions about their financial goals, investments, retirement, insurance, wealth management, and more. Advisors might focus on one area of expertise or specialize in a range of different services. Therefore, your compensation structure might vary based on whether you sell investment or insurance products, offer financial advice to your clients, or provide a combination of both.
How Financial Advisors Earn Money
Commission-Based Structure
If you offer investment or insurance products to clients, you can receive a commission for the sale. That sales charge can run anywhere from 1–6 percent of the investment product. While this usually comes out of a client’s own wallet, it can also be paid by the firm behind this product as part of their built-in marketing expenses.
However, selling commissioned-based investment or insurance products can sometimes result in a conflict of interest. For example, financial advisors who work off commissions might be incentivized to sell clients a product that will earn the highest commission.
To avoid this pitfall and maintain an ethical business model, follow the U.S. Securities and Exchange Commission’s Regulation Best Interest (Reg BI) protocols. Reg BI requires all broker-dealers to offer products that will serve their clients’ goals, deliver reasonable care, and be transparent about any conflicts of interest.
Fee-Based Structure
With this compensation structure, your clients will be charged a fee—a flat rate they negotiate, a services retainer, or a percentage of the assets under management (AUM). A financial advisor can sell investment or insurance products within this model to earn an extra commission. However, conflicts of interest can also arise here, so it’s crucial to operate as a fiduciary (one with a legal and ethical relationship with the client).
Fee-Only Structure
The terms fee-only and fee-based might sound similar, but key differences exist. Financial advisors who use a fee-only compensation structure are fiduciaries who must place the client’s interests above their own. Since fee-only advisors do not sell investment or insurance products, they cannot accept commissions.
Fee-only advisors earn an hourly rate through a retainer or a percentage of a client’s AUM. In most cases, they will change one percent of the AUM. So, if a client has $500,000 managed by a fee-only financial advisor, the service cost would be $5,000. The amount you earn from a client might fluctuate annually, but the fee percentage will remain consistent.
Your Business Model Will Determine How You Make Money
How you earn money as a financial advisor will depend on your licenses, certifications, experience, and business model. Each payment structure has pros and cons. Often, financial advisors use fee-only compensation to distinguish themselves from competitors in the field. Whether you accept fees or commissions, the clients must come first.
