Lynn Zhang one of the nation’s top 100 women financial advisors provides a good explanation of the different compensation structures for financial advisors.
There are 3 key parties in the financial planning relationship:
- The Advisor
- The Product Company
The financial advisor can be compensated in 1 of 3 ways:
- Commission Only
The commission only financial advisor gets paid every time they make a sale. They give you a recommendation, you follow that recommendation, purchase the product from the product company. Then the product company pays the advisor a commission for the sale.
So…more sales = more commission and certain products pay a higher commission than others.
Fee-Based financial advisors choose whether they want to get paid with commissions, fees, or both. You don’t know how they get paid when they are giving you a recommendation. They are not required to disclose this information to you.
For example – they can charge you a fixed percentage or fee to manage your portfolio, but they can also make a commission when they advise you to take money from your portfolio to purchase a product.
Fee-Based financial advisors can also receive additional compensation from product companies for keeping your assets with that company.
Fee-Only financial advisors receive no compensation from the products companies. They only receive a fee from you for providing advice and managing your portfolio. Therefore they have no incentive for recommending one product over another.
It is the only compensation structure that is truly free from any conflict of interest.
Because this type of structure is preferred by more and more clients, many fee-based financial advisors like to represent themselves as fee-only.
Jason Zweig of the Wall Street Journal investigated and wrote an article on this, outlining many financial advisors falsely marketing themselves as fee-only, when they are actually receiving compensation from product companies.
You want to verify this with your financial advisor, and make sure that you are comfortable with them before choosing them to manage your portfolio.
Of course compensation structure is only one of many factors that you should consider when choosing a financial planner.
Here’s Your Next Step…
At Calvert Investment Counsel, we are a fee-only based financial advisor based in Hunt Valley Maryland. If you would like to learn more about how we can help you achieve your financial goals free from any conflict of interest, give us a call at 410-435-3270 or click here to contact us online.