Financial advisors who are also brokers are reimbursed by mutual fund companies when one of their clients invests in a fund the company sponsors. In such cases, the financial advisor receives a trailer fee, which is a fixed percentage of the client's investment in a mutual fund, as long as the client's money remains invested in the fund.
In addition, financial advisor-brokers receive payments that come from the front- or back-end loads, or fees, that a mutual fund charges the investor when its shares are bought or sold. Financial advisors receive a small percentage of these load fees.
Financial advisors may receive commissions or fees from a variety of financial products they recommend to their clients. Financial advisors who do not earn commissions or fees from anyone other than their clients are known as "no-fee" or "fee-only" fiduciary advisors.
Key Takeaways
- Financial advisors build personalized financial plans for their clients, including goals for investments, budget, insurance, and savings.
- Advisors also steer their clients toward certain investments and may execute trades in the financial markets by proxy for their clients.
- Advisors who are also brokers get paid commissions by a mutual fund in exchange for getting their clients to purchase the funds.
- These advisors receive a trailer fee, a set percentage of what the client invested in the fund, for as long as the client stays invested in the fund, plus a share of the front-and-back end fees that a fund charges its clients.
- Fee-only fiduciary advisors don't receive payments from mutual fund companies or any other parties other than their clients.
How Financial Advisors Get Paid
The job of a financial advisor is to create a personalized financial plan based on each client's income, long-term goals, and financial situation. It may include a budget and a strategy for saving and long-term investing. Depending on the client, it may include recommendations for life insurance, a college savings plan, a portfolio of investments, and more.
Advisors may steer their clients toward specific investments, such as certain mutual funds. If they are also registered traders, they may execute trades in the financial markets by proxy for their clients. In such cases, they may receive compensation by the sponsor.
Registered financial advisors may follow either of two standards:
- The fiduciary standard requires them to act in the best interests of the client in recommending investments. They are compensated only by their clients.
- The suitability standard requires them to recommend investments that are suitable to the client's situation. They may receive payment from companies for recommending their products.
Stephen Rischall, CFP®, CRPC
Navalign Wealth Partners, Encino California
If your financial advisor is a broker, the answer is yes. Brokers are paid commissions based on the products they sell and are oftentimes incentivized to sell certain products over others. When you purchase a mutual fund with a sales load, part of that additional expense is used by the mutual fund company to pay a commission to the advisor. Additionally, most mutual funds charge a 12b-1 fee as part of their expense ratio collected each year. Part of that fee goes toward paying the broker a trailer commission, so long as the client remains invested in the fund.
In contrast, if your financial advisor is a fee-only, fiduciary advisor, then they do not receive commissions or compensation from outside parties.
How Financial Advisors Earn Trailer Fees
Mutual funds pay financial advisors ongoing trailer fees, ranging from 0.25% to 1% per year of the amount invested. The fees are intended to motivate financial advisors to recommend that their clients invest in their mutual funds.
As long as the client remains invested in the fund, the fund pays the financial advisor the percentage fee.
How Financial Advisors Earn Load Fees
Mutual funds charge their investors front-load fees when they buy into the fund and back-load fees when they leave it. Every time an investor buys or sells shares of the fund, they are charged one of these fees.
A financial advisor receives a small share of both of these fees. It is termed a contingent deferred sales charge by the mutual fund company.
How Do Financial Advisors Get Paid?
A financial advisor may get paid in one of several ways. If it is not immediately clear, the client should ask.
- A fee-only fiduciary advisor is paid only by the client.
- A "fee-based" financial advisor may be paid by both the companies that sponsor investments the advisor recommends and by the client.
- A commission-based advisor is paid only by the companies that sponsor investments the advisor recommends. The service is free to the client.
What Percentage Do Financial Advisors Charge?
If a financial advisor charges a flat annual fee, the average cost is 1% to 3% per year of the assets in the account. That generally covers most advisory services, investment research, and trading.
The client may choose to be billed hourly fees.
Which choice is better depends on the amount of service you expect from an advisor. If you want frequent contact with an advisor and frequent changes to your investments, the flat fee might be best. If you want help drawing up a long-term financial plan but expect to leave your investments alone for the long haul, the hourly fee may cost you less.
Is It Worth It to Pay a Financial Advisor?
How confident are you in your ability to handle your finances independently? If you're not all that confident, a session with a financial advisor can get you on a long-term spending and savings plan that is feasible and makes sense for you and your family, given your current income and future goals.
The advisor will want to know if you have sufficient life insurance to protect your family; whether you're saving enough towards retirement; whether you're a homeowner or want to be, and much more.
This may turn into a long-term relationship with a financial advisor, or not. Your plan should change with your circ*mstances over time.
FAQs
Mutual funds charge their investors front-load fees when they buy into the fund and back-load fees when they leave it. Every time an investor buys or sells shares of the fund, they are charged one of these fees. A financial advisor receives a small share of both of these fees.
How are financial advisors compensated? ›
First, if an advisor is a broker, which the majority of advisors are, they receive a commission based on the products that they sell and the investments they recommend. The commission can be upfront (when you buy), it can be on the back end (when you sell), or it can be trailing (they get paid a portion annually).
Are agents compensated by mutual funds? ›
Initial commission is paid to distributors when they assist investors in mutual fund investments. This commission is given at the time of investment and is a one-time payment. It is typically a percentage of the invested amount, ranging from 0.5% to 1.5%. This is based on the mutual fund type and distributor.
How do mutual fund advisors make money? ›
A mutual fund investment advisor can earn commissions directly from a fund house or through distributors who sell the schemes of the house. Mutual funds advisors offer expertise in both selecting and making a portfolio of mutual fund schemes that align with the financial goals of investors.
Do advisors get paid on ETFs? ›
If you don't pay an annual fee, the load is the commission the financial advisor receives. ETFs don't often have large fees that are associated with some mutual funds. But because ETFs are traded like stocks, you may pay a commission to buy and sell them, although there are commission-free ETFs in the market.
Why do financial advisors push mutual funds? ›
Mutual funds pay financial advisors ongoing trailer fees, ranging from 0.25% to 1% per year of the amount invested. The fees are intended to motivate financial advisors to recommend that their clients invest in their mutual funds.
Is 2% fee high for a financial advisor? ›
Answer: From a regulatory perspective, it's usually prohibited to ever charge more than 2%, so it's common to see fees range from as low as 0.25% all the way up to 2%, says certified financial planner Taylor Jessee at Impact Financial.
What is the commission for a mutual fund advisor? ›
The overall commission structure broadly lies between 0.1% to 2% and also varies across each scheme based on the AUM and the slab or market share held by a Mutual Fund Distributor in that scheme.
Do mutual funds pay commission? ›
Mutual fund fees generally fall into two categories. Both categories, “shareholder fees” and “annual fund operating expenses,” are disclosed in the fee table in the front of a fund's prospectus. Some funds charge a commission to be paid to brokers when you buy or sell your shares.
How does a financial advisor get paid on a 401k? ›
When employers pay for financial advisors, they typically write a check annually or quarterly. The fee may be based on services provided, or it may be calculated as a percentage of investment assets. When employees pay for financial advisors, the fee may be paid as either a flat fee for services or an asset based fee.
Fee-based advisors blend the commission-only and fee-only models. They can sell you an investment and get a commission from that transaction, or they may charge you a fee calculated as a percentage of assets to manage your portfolio, or they may do both.
Why do you need a financial advisor for a mutual fund? ›
Charting an Investment Plan
Based on the clients' needs, the fund advisor will evaluate current market conditions and come up with an ideal investment portfolio for the client. They keep track of the latest financial news and trends. They advise their client on how to diversify their portfolio to minimise risk.
How does a financial advisor make his money? ›
What Are the Ways Financial Advisors Get Money? The three main ways advisors get money are via commission, hourly-based fees, and advisory fees. Rates and average fees within these frameworks can vary widely, and some advisors may combine two or more structures.
Do financial advisors get commission from mutual funds? ›
There are several forms in which an advisor can receive their commission. These can include upfront sales fees; loads on mutual funds; commissions from annuities or other insurance products; a surrender charge on an annuity; or trailing commissions, in which the client pays a fee for each year they own an investment.
How do Vanguard advisors get paid? ›
The average Financial Advisor base salary at Vanguard is $90K per year. The average additional pay is $34K per year, which could include cash bonus, stock, commission, profit sharing or tips.
Why don't financial advisors recommend ETFs? ›
“As long-term investors, we don't place much value on the ability to trade ETFs intraday. In fact, it can encourage short-term trading which can increase risk.” Performance, of course, matters too.
How do financial advisors make money off you? ›
Fee arrangements can vary. Some financial planners and advisors are paid on a retainer or hourly basis. Most fee-only advisors will charge clients based on a percentage of the assets they manage for you. Fees can vary, but they generally average somewhere around 1% of the total value of the investments being managed.
What percentage of profits do financial advisors take? ›
Cost: The median AUM fee among human advisors is about 1% of assets managed per year, often starting higher for small accounts and dropping as your balance goes up. What you get for that fee: Investment management, and in some cases, a comprehensive financial plan and guidance for how to achieve that plan.
What commission do financial advisors get? ›
Mutual funds: Typically, advisors making commissions on mutual funds get paid via a trailer fee. This commission can range from 0.25% to 1% of the assets invested in the fund on an annual basis. The advisor may receive this fee as long as the investment remains in the mutual fund.
How do financial advisors take their fee? ›
Some financial advisors charge by the hour or by the project for their services. Financial advisors whose fees are based on assets under management (AUM) will charge a percentage based on the client's net assets they manage.
