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.

Commissions are usually a percentage of the amount you invest in a product.

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.

An individual or firm that offers investment advice for a fee. Both are usually registered with the Securities and Exchange Commission and/or the states in which they practice.

The total investments of an individual or company.

Anything of value that a person or organization owns. Examples include cash, securities, accounts receivable, inventory, and property such as land, office equipment, or a house or car. (Compare with liability. The same item can be both an asset and a liability, depending on one's point of view. For example, a loan is a liability to the borrower because it represents money owed that has to be repaid. But to the lender, a loan is an asset because it represents money the lender will receive in the future as the borrower repays the debt.)

A fee an investor pays a broker for executing a transaction--buying or selling stock. The commission may be a flat fee, for example, $75.00 per trade; it may be set at a certain amount per share of stock involved in the transaction; or it may be based on the total value of the transaction.

The medium of exchange used in trade or commerce.

Portion of a company's capital owned by a party and represented by the number of shares possessed. Stock represents equity in a company. There are many types of stock--for example, blue-chip, common, preferred, and growth.

A contract in which one party, called the insurer, agrees to protect another party, called the insured, against loss, damage, or medical costs in return for a premium. Another way to look at insurance is to see it as the assumption of risk by another party. In return for a periodic fee (the premium) and a set of requirements by which to abide, an insurance company will assume risks taken by those covered. Insurance companies are regulated by the insurance commissioners of their respective states or territories.

A broad term generally referring to how one plans to handle one's financial situation. More specifically, it can mean where an investor wishes to invest his or her money, how long it is to be invested, and what his or her goals are. There are advisors who offer services in financial planning.

A firm that helps investors trade securities.

The purchase of a potentially appreciable asset such as a stock, a bond, a property, or a unit of production. The purchase provides funds for the growth of businesses and governments.

A brokerage account in which the advisor manages a group of investments for a set annual fee.