How does a financial advisor make their money and how can you expect to pay for their services or products? Financial advisors typically use one of three structures to earn compensation: fee-only, commission-based, and fee-based. To find the ideal financial advisor for you, it’s important to understand his or her compensation structure upfront.
Today, we’re examining Financial Advisor Compensation to help you make the most informed decision when it comes to finding a financial advisor you trust.
Fiduciary Standards vs Suitability Standards
It’s important to note that there are two primary distinctions between financial advisors; those that abide by fiduciary standards and those that abide by suitability standards.
Fiduciary standards are generally considered more favorable to clients. In fact, U.S. News and World Report describes fiduciary standard as, “the highest level of accountability to you, the client. A fiduciary advisor must make recommendations that are best for you, even if those recommendations result in less income for him or her.”
Suitability requirements are less strict and may favor the advisor. Suitability requires brokers or financial advisors to simply provide advice and financial products to clients that are ‘suitable to the client’s needs’. While this sounds like reasonably protective language, it allows for advisors to recommend particular financial products to potentially earn more commissions. As long as the advisor can prove the product is ‘suitable’ for the client then it’s legally acceptable; even if the product might not be the best product/advice for the client.
In short, fiduciary’s carry the highest responsibility to clients and thus are revered with high regard. At Idaho Medical Association Financial Services, all of our financial advisors are held to fiduciary standards. In other words, we always put our client’s best interests first.
Fee-only financial advisors are paid via flat hourly fees, retainer fees, by project or task basis, and/or based on a percentage of assets under management. Advisors are not incentivized to sell or recommend specific products to clients like in commission-based structures. Many people consider fee-only models as the most transparent type of compensation structure. In fact, according to Forbes, “Fee-only advisors have fewer inherent conflicts of interest, and they generally provide more comprehensive advice.”
At Idaho Medical Association Financial Services, this is the type of compensation structure our firm uses. We believe in this model and use it to serve our clients in their best interest. A final benefit to consider from fee-only financial structures is that clients are free to leave whenever they feel obliged. If a client is not happy with the portfolio performance, he or she can leave without any surrender or cancellation fees.
Financial advisors compensated on a commission-based structure are paid like typical commission-based salespeople. They make money when their clients purchase or utilize a specific product or service. It’s important to note that commission-based financial advisors operating under fiduciary rules must still maintain the absolute best interest of the client; however, the products and services they offer will be directly linked to a commission.
For example, commission-based financial advisors may receive kickbacks from financial corporations when new clients open an account or on the sale of a financial product.
Fee-based financial advisors take a blended approach between the two previously discussed compensation structures. These types of financial advisors receive a commission based on financial products or services sold, as well as fees as previously described.
According to Investopedia, “Fee-based advisers follow the suitability rule for their clients, meaning they cannot sell their client an investment product that does not suit his needs and objectives. They also have a fiduciary duty to their clients over any duty to a broker, dealer or other institution.” It’s important for clients to fully understand the cost of doing business with a financial advisor. This will affect the long term outcome of both growth and earnings.
Idaho Medical Association Financial Services is a financial and wealth management firm specializing in personalized financial guidance to accredited investors in the medical field. Areas of speciality range from investment planning and retirement analysis to in-depth services such as tax analysis and strategies, insurance and estate planning and financial planning. For a free financial consultation, please call: (208) 504-1736 or email email@example.com.