How Are Investment Advisors Compensated?
One of the important things to know when you're shopping for an investment advisor is the basis on which advisors are paid. Investment advisors have several different ways of charging clients. If your investment advisor is managing your portfolio for you, he or she may charge you a percentage of the assets under management.
Many investment advisors charge commissions. They receive money for financial products and services (such as stocks or insurance) you buy from them. Commissions are usually a percentage of the amount you invest in a product. Advisors can also charge by flat fees. They charge by the hour or by a fixed rate. For example, you might be charged $500 for a comprehensive financial plan, no matter how long it takes to draw it up. Advisors often charge a combination of commissions and fees.
Some advisors may receive salaries from their brokerage or investment firms. Others may use wrap accounts. In a wrap account, the advisor manages a group of investments for a set annual fee. The intent of a wrap account is to eliminate investors' fears that the advisor is recommending an investment only to receive a commission. The annual fee remains the same no matter how many investments the advisor buys or sells. There are no commissions, but the annual fee is generally very expensive.
Because investment advisors can be compensated in a number of ways, it is important to ask how your prospective advisor is paid and to understand how his or her compensation will affect your investment bottom line.