How is your financial advisor paid?
You know that your financial advisor’s assistance and professional advice can make a huge difference in how you live your life, and whether you reach your goals. But do you ever wonder, or do you know, how your financial advisor gets paid? You’re not alone.
Commissions, fees, and how they work are all a bit of a mystery for the average investor. The good news is that, starting in 2017, investment firms are required to provide a new report, called the Charges and Compensation Report, to outline how advisors are paid, so it will be easier to understand.
Generally speaking, advisors receive income in four ways:
1. Salary
Some advisors, such as those at Educators Financial Group, are paid an annual salary by the company that employs them. Because they are not paid commission, their clients can be confident of receiving unbiased advice based on their unique needs and goals.
The financial advisors at Educators Financial Group provide professional planning and independent advice, as well as solid investment strategies, to help investors achieve their financial goals. “At Educators, our clients are happy knowing investment recommendations are based solely on their needs”, says Franc Oliveri, Certified Financial Planner professional.
2. Commission-based (receives most of their income from commissions, but may also generate fees)
Commissions can be generated from individual stock and bond transactions, mutual funds, and more. With mutual funds, the fund company may make ongoing payments to your advisor and their dealer in return for the services they provide you, the owner of the funds. For example, most equity mutual funds pay a trailing commission of 1% of the amount invested, which is split between the advisor and dealer. These commissions make up part of the management expense ratio (MER) of the fund. Since mutual fund returns are posted net of expenses, if you had a fund with a MER of 2%, and the published return is listed as 4%, the fund actually earned 6% before expenses.
At Educators Financial Group, our financial advisors are not paid by commission, so you receive objective advice on financial and estate planning, developing a portfolio that helps you reach your goals, and more. If your advisor is commission-based, it’s fair – and wise – to ask if they make more money recommending one investment over another.
3. Fee-based (receives most of their income from fees, but may also receive commissions)
Fee-based advisors charge either an annual percentage of your assets under management (which ranges from 0.5% to 3%), or an hourly rate.
If an advisor is hired for a specific project, such as creating a retirement plan, a flat fee would be charged; if the investment is ongoing (like stock options, a quarterly or annual fee would be charged to manage the funds.
4. Fee-only
A fee-only advisor receives 100% of their income from fees charged direct to their clients. Once you agree on the fee, you know what you’ll get and what you’ll pay.
Take the time to discuss how your financial advisor is paid, and how it might affect your investments. Your new Charges and Compensation Report that you’ll receive in January will help you in the conversation. At Educators, we are always eager to discuss your investments and how they work with you. We look forward to talking to you soon, call us with your questions at 1.800.263.9541.
For more information on the value of advice, read these articles in The Learning Centre:
- Protect your future with professional advice.
- Fund managers and advisors – more than meets the eye.
- Ensuring investors benefit from regulatory changes.
Sources:
http://www.moneysense.ca/save/financial-planning/just-how-are-you-paying-your-financial-advisor/
http://www.getsmarteraboutmoney.ca/en/managing-your-money/planning/getting-advice/Pages/four-ways-advisers-are-paid.aspx#.WBtP5dxTCmc
