We are often asked by clients and prospective clients how we are paid. In general, there are two different payment structures an advisor will have: fee-only and commission-based. Some advisors use just one method while others—such as Kramer Wealth—use a combination of the two for various services offered. Let’s take a look at each of these payment models in detail.
- Fee-Only Payment
When financial advisors work on a fee-only basis, they generally get paid for the plans they make for their clients, regardless of whether the client actually executes any of the suggestions on the plan. Clients may be charged an hourly fee or a flat fee for the service and it is paid directly by the client out of their pocket. Some fee-based planners may also get an annual management fee, which is a percentage of the assets managed and is generally deducted from the account balance.
- Commission-Based Payment
The second method of payment for financial advisors is a commission paid for the purchase or sale of certain insurance or investment products. Commissions are paid to the financial advisor directly by the investment or insurance company but come from the client’s account in one form or another. Some commissions may be deducted up front at the time of purchase in the form of a sales load or they may be deducted from the proceeds of a sell transaction. Still other commissions may be paid through the internal expenses built in to an investment or insurance product.
In some instances, you may find an advisor who gets paid salary and bonuses, such as wire-house brokers who are employees of the company they work for. Examples of these types of firms are Merrill Lynch, Morgan Stanley Smith Barney, UBS, and Wells Fargo. However, commission- and fee-based earnings are more common in the industry.
It’s always a good idea to understand how your advisor is getting paid so that you can be aware of any added interest they may have in the decisions you make. A good advisor will always point you toward investments and products that are right for your risk tolerance, goals and timeline. When you work with Kramer Wealth Managers to create your WealthPath, we make sure to focus on investments and products that will be best suited for you, regardless of the payment involved.
*The discussion of advisor fees should also state that investors should be aware that the deductions of fees will impact their overall account returns.