How Financial Advisors Make Money

Financial advisors are in the business of advising their clients on how to manage their money. There are many different types of financial advisors and offering different services to clients. In the recent 2020 data from the Bureau of Labor Statistics (BLS), the median salary for a financial advisor is $89,330. The compensation, however, varies in the type of services that a financial advisor provides.

Types of Financial Advisor Services

There are many different types of services that a client can get from a financial advisor, and the type of service they offer will often depend on their employer. 

Investment Advice 

A financial advisor looks at your income and assets and provides advice about how to make money with them.  They might help you decide which investments might be best for you based on your age, whether or not you want to take risks, etcetera.  Financial advisors may also guide buyers through investing in stocks or bonds, work alongside lawyers who buy property, and help people set up retirement savings plans like Individual Retirement Accounts (IRAs).  They can also provide loans secured by portfolios of investments and act as mediators when major financial decisions need to be made and do several other things.

Income Tax Preparation

In some instances, people who provide this service do not have accountants’ licenses. People who want to prepare their own taxes can also use software or go online for help.

Accounting and Bookkeeping Services

These are services that would help individuals maintain their financial records. They may also help small businesses with accounting, taxes, payroll processing, and other related tasks.

Estate Planning

A financial advisor will look at an individual’s assets, income, expenses, insurance policies, debts, and any other factors that may be relevant to their situation.  They also provide advice on what is best for them to manage their assets and pass these assets onto their next of kin or chosen beneficiary. Financial advisors will often work with clients who have a lot of money, such as big-time royalty, politicians, celebrities, business owners with tons of money to invest, and other people who want to protect their assets. With so many options available, it can be difficult for someone who wants to invest in deciding how they feel most comfortable putting their money into something that will grow.  For example, some people are more risk-averse than others and would instead choose more stable investments. Others understand the risks involved but are willing to take them to make bigger gains.

How Do Financial Advisors Get Paid?

Financial advisors may get paid in a number of ways, including:

Commission

Financial advisors who work for a brokerage firm, mutual fund company, or other financial institution (and there are many) may be compensated by accepting commissions.

Hourly Rate

Some financial advisors charge an hourly rate for their services. For example, if someone needs help with income taxes and tax preparation, they might also need help with bookkeeping and accounting.  In this case, they may hire a financial advisor at an hourly rate to provide these services. Financial advisors usually have to have licenses before they’re able to do this type of work.

Fixed Fee

This is where people pay one payment for financial services. This payment usually covers the creation of a plan and any execution of this plan over a certain length of time.

Retainer

A retainer is where a financial advisor may charge a fixed hourly rate for their time without providing a specific service.  For example, individuals who might pay for life insurance through their job or a group plan cannot get a customized rate or policy.  They may, however, pay the advisor a retainer fee for their services over time to help them work towards getting a personalized insurance policy that will suit their needs. Financial advisors may also make money by advising people who have retirement plans from an employer or other organization.  They do this because they will build and manage portfolios for their clients based on what kind of risk level the client is most comfortable with. They may also choose investments for these retirement plans. Financial advisors may be paid by receiving a salary from a company, or they may work as independent consultants who get commissions from various companies for increasing their sales. 

Financial Advisor Fee Structures

There are two types of fee structures for financial advisors: fee-only and fee-based.

Fee-Only

Fee-Only is where financial advisors do not take commissions and instead charge one flat fee that covers all the advice and other related services they provide. They will typically charge an hourly rate for any time spent discussing prospects and investments with clients.

Fee-Based

Financial advisors who work on commission might charge a percentage of assets under management for managing funds in exchange for providing investment advice or executing trades on behalf of investors.  For example, if someone has $10 million invested in a mutual fund, the advisor might charge a percentage of assets based on the total value of those assets.

Tips in Finding a Financial Advisor

Here are some tips you can use when finding a financial advisor: Tips_in_Finding_a_Financial_Advisor_(2)

  • When seeking a financial advisor, people should remember to take the time to research the individual and their company. 
  • Ask for references and get in touch with some of them to decide whether or not this would be a good fit. 
  • Look at the advisors’ client testimonials, and do an online search about their qualifications and experience. Insurance agents, for example, are required to have a license to sell policies. 
  • Ensure that the advisor you’re considering has these credentials before investing any time or money working with them.
  • Finally, remember that an established company signals experience and trustworthiness.

If you are looking for advisors who strictly follow fiduciary duty, you might want to consider Fee-only Advisors. Learn more about them here: Fee-Only Financial Advisor

Salient Points

  • The fee structures for financial advisors vary, and the one that is right for you will depend on your goals. 
  • You may want to consider a commission-based advisor if you need help with retirement plans from an employer or other organization, but they might not be as good at managing assets. 
  • If you’re looking for someone who can manage your finances in exchange for providing investment advice or executing trades on behalf of investors, then a fee-based advisor might work better. 
  • Be sure to do some research before choosing which type of advisor to hire.
Financial advisors may offer a range of services, and the level of service that they provide may vary. Make sure that you're comfortable with their experience and qualifications before letting them take care of your finances.
A good way to tell whether or not you can trust a financial advisor is to check their credentials. They should be a registered financial advisor and have a license or other proof of qualification if they can provide investment advice or execute trades on behalf of investors.
If you get investment advice from a financial advisor, then you may need to give them permission to manage your portfolio. If you're looking for help managing retirement plans, then you might have more options.
Ask your prospective advisers for references, and talk to some of the people on their list. If you're looking for help with retirement plans from an employer or other organization, ask how confident they are about reaching the goals they would establish for such a plan.
Fee-only financial advisors charge a flat rate for their services, while fee-based advisors are paid through commissions. If you're comfortable with the level of service that your prospective advisor provides, then it might not matter which they prefer to use.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.