Professional Fees, a Fixed Salary, or Commission?

Investors often have a hard time understanding what they're paying their financial advisors for and what services the bill entitles them to. Different types of financial advisors are paid in different ways:

  • Fixed salary
  • Commission
  • Professional fees

Fixed Salary (investment advisors, financial planners)

The investment consultants who work on a fixed salary are mainly those at banks and credit unions. They are paid according to the institution's salary scale. They generally receive annual bonuses for selling certain products and reaching their objectives. Discount brokers also usually receive a fixed salary.

  • Advantages
    • You don't have to pay for the preparation and implementation of a financial plan.
    • You can draw on the expertise of other professionals to develop a better financial plan.
    • They can help you gain an overall picture of your financial situation.
  • Disadvantages
    • The product selection is often limited to products offered by the consultant's financial institution. This disadvantage can turn into an advantage, however, since consultants know their products inside out and can offer the best solution for you.

Commission (full service brokers)

Full service brokers offer investment advice and can perform a wide range of transactions for investors. As such, they can charge their investors a commission on each sale and purchase transaction, about 1% to 3% of the transaction's value.

  • Advantages
    • You only have to pay if you accept their advice and ask for a transaction.
  • Disadvantages 
    • There's a certain degree of uncertainty involved in brokerage advice. Some investors worry their brokers will push extra purchases or sales to inflate the number of transactions. Remember that the more transactions you make, the less your net return on investment since you'll have more transaction fees to pay.
    • Brokers may have a tendency to recommend products they have in stock in order to sell out.

Professional Fees (brokers, discretionary management specialists)

A number of institutions that offer brokerage services have been using a professional fee structure for a number of years. The fees depend on the level of service desired and the percentage of assets under the consultant's management. Since investors don't pay by the transaction, there's no financial incentive for brokers to recommend a change in their portfolios.

  • Advantages
    • Fee-based accounts tend to eliminate the risk of needless or excessive transactions.
    • Consultants can recommend any investment, even if they don't receive a commission.
    • This type of pay structure promotes a positive relationship with the investor based on professional know-how.
    • It can help you gain an overall picture of your financial situation.
  • Disadvantages
    • There's the chance that brokers may neglect investor services, since there's no incentive to sell.
    • Product selection is limited to those the broker is familiar with.

Independent Financial Advisors

Independent financial advisors are generally financial planners with no ties to any firm or financial institution. They analyze your portfolio, but cannot recommend any specific product. Instead, they recommend a class of investment that you should focus your portfolio on and to what extent. You're billed for each consultation at an hourly rate of $200 to $350.

  • Advantages 
    • They can help you work out a program without promoting any specific product or vendor.
    • They can help you gain an overall picture of your financial situation.
  • Disadvantages 
    • You may have to pay other consultants when it comes time to make your transactions.

In Short...

The fees for a full service broker are set out in a service agreement between the 2 parties. Consulting fees are negotiable, especially when transaction volume or portfolio value is high. What matters is that you're comfortable with the fee you've negotiated. A financial advisor who is trustworthy and professional will not let payment method influence the advice he or she gives. The growth and security of your capital should be good indicators that you and your advisor are on the right track.

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