It depends. There are three commonly used fee structures: fee-only, fee-based, and commission-based,
Advisors can be compensated in three ways:
- Fee-only Planners do not earn commissions on transactions. They are either paid an hourly rate for advising, a percentage based on assets under management (AUM), or a retainer fee.
- Fee-based Planners can earn commissions on a number of financial products they sell or recommend in addition to being paid an hourly rate for consultations and/or AUM fees.
- Commission-based Planners only earn commissions on financial products they sell and securities they broker.
It’s impossible to say exactly how much you will end up paying for an advisor – it really depends on the type of advisor you decide to hire, the amount of trading or planning you will be using them for, and the size of your portfolio.
In some transactions with commission-based planners, you may not see any out-of-pocket cost; their commissions are built into the products in such a way that it may not appear that there is any direct cost for their services.
Variable annuities are a good example of this: the companies that sell them have fees built into the product, which are disclosed to the client, but the amount of compensation that the advisor receives may not be disclosed. The compensation is often based on a present value calculation of a small portion of the annual fees and is usually paid to the advisor up-front.
This is not necessarily bad for investors except that the advisor has lost some of the incentive to keep up with the investment and to help it thrive.
Do I need an Advisor on a permanent basis?
Should I Pay for Financial Planning Services?