How Do Financial Advisors Make Money?
If you've ever inquired about getting a financial advisor, you may have gotten mixed reviews. Some people love them, some people put up with them, and some won't come within 10 feet of them. The world of financial advisors is a mixed bag, and it is tough to figure out who may be helping you gain wealth and who might try to take it from you.
Here's the good news, educating yourself on the different types of financial advisors as well as how they make money will prepare you to make an informed decision. From there, you can decide what the right fit for you is.
1. The Broker
The broker is what you think of when you think financial advisor. The broker is also known as a "registered representative." These are individuals who make a percentage off of your overall portfolio and are legally allowed to sell you financial products such as mutual funds, annuities, or insurance contracts. Brokers make money off of commissions. Commissions can come in many different forms whether they make it when you buy something, sell something, or on a continuous basis.
In layman's terms: You never physically write them a check or pay them. However, they are still getting paid and making money off of your money. You are never quite sure how much which is why they can get a bad reputation.
Where do you find them? Merrill Lynch, Morgan Stanley, Goldman Sachs, J.P. Morgan Chase, Edward Jones, Bank of America - i.e., everywhere.
2. The Independent or Dually Registered
Independent advisors may be your mom and pop advisory firm but with a whole lot of backing. These are individuals or teams that may operate under a different name like "Johnson & Gold Wealth Advisors" but are affiliated with a much larger broker-dealer like Merrill Lynch, check their business card. They charge a flat fee or a percentage of your overall portfolio (assets under management).
In layman's terms: You never physically write them a check or pay them. However, they are still getting paid and making money off of your money. You may be more inclined to work with them because they are a friend or neighbor.
Where do you find them? Small shops all over the country.
Fee-only financial advisors cannot earn a commission and can only make their money from the fee's they charge their clients. The costs can be a percentage of their assets or a flat rate fee. These are also known as registered investment advisors or RIA. Their services today can be competitive with the independent and the broker whereas this wasn't the case.
In layman's terms: You can pay them directly. They do not get paid from a larger firm to work with you. You may be more inclined to work with them because they are a friend or neighbor.
Where do you find them? Small shops all over the country. They typically advertise "fee-only" where independent brokers do not.
A CFP is a certified financial planner that helps you come up with a financial plan. They can offer you advice but typically do not manage investments, therefore, do not have access to taking a percentage of your overall finances. These individuals are usually fee-only. They can help you with estate planning, tax returns, budgeting, and investment allocation.
In layman's terms: You pay them directly. They do not get paid from a larger firm to work with you. They will not manage your investments.
Where do you find them? Small and large shops all over the country. They can operate on their own or within a larger firm. The CFP designation is only for to those who have passed the certified financial planner exam and qualifications.
Where does Money Therapy reside? We reside under the fee-only based advisors. We do not receive compensation from a larger firm and have our client's best interests in mind. Are you looking for more information? Come chat with us.