How Financial Advisors Are Paid

If you love awkward situations, ask your financial advisor how he or she is paid. A typical response involves some trepidation, rambling about value being more important than fees, and usually ends with you receiving a mutual fund prospectus. However, we tell you below why it’s important to know what your fees are for, and who’s writing your advisor’s paychecks.

You are paying your financial advisor, one way or another.

There are three ways financial advisors are paid:

1. Commissions
A commission is a kickback given to the advisor from the investment product he sells to you. The commission comes from the company who makes the product — and it’s coming from a fee that you are paying. Sometimes this fee is blatant, like a 5.75 percent up-front sales charge on a mutual fund. Other times, this fee is hidden, like many fixed annuities that “don’t cost you anything,” but manage to pay the advisor a seven percent commission.

2. Asset-based fees
An asset-based fee is a fixed percentage fee that is charged on the assets a financial advisor is managing. A typical asset-based fee ranges from one to two percent annually (multiply the account balance by this percentage), and can be paid from the investment account or out-of-pocket.

3. Fixed or hourly fees
Fixed or hourly fees are used when a financial advisor is providing financial planning. They are not typically used for managing investments. An advisor can charge a one-time cost for a financial plan or can charge an ongoing, monthly fee, or even charge by the hour.

Not knowing your fees is usually a sign they are high.
If you don’t know what fees you are paying, chances are your advisor didn’t cover this with you. This might be a sign that the fees are high or unpleasant to talk about (like, “I am going to charge you 5.75 percent every time you invest money in this mutual fund”).

How your financial advisor is paid affects the type of relationship you have.
This isn’t a standalone issue. It undeniably affects the type of relationship you and your advisor have. Advisors that charge an asset-based fee or fixed/hourly fees are legally held to a higher standard of care, while advisors that charge commissions are simply salespersons of their firm.

How are Stewardship Financial advisors paid?
We feel that calling ourselves financial advisors and then working as investment product salesmen doesn’t make sense (trust me, I was a commission-based salesman when I started in the investment industry). If ever there was a profession that should limit conflicts of interest, it should be investment advisors who manage other peoples’ money. Unfortunately, commission-based advisors often have the most conflicts of interest.

This is why Stewardship Financial charges an asset-based fee to manage your investments. We love what we do, and we want to limit any potential conflicts of interest. This means we get to use high-quality, low-cost exchange-traded funds (ETFs) and mutual funds in your investment portfolio.

Want to learn more about managing your investments with Stewardship Financial? Let us know today!

This post was originally posted at http://moneywellrooted.com/2017/05/16/how-financial-advisors-are-paid.