What Commissions Do Financial Advisors Earn?

Financial advisors earn commissions through various methods, depending on their business model and the products they recommend. Some advisors receive a percentage of assets under management, typically ranging from 0.5% to 2% annually. Others work on commission-based models, earning 3-6% when clients purchase investment products like mutual funds or insurance policies. Fee-only advisors charge flat rates, hourly fees, or project-based compensation without product commissions. The financial industry has been shifting toward more transparent fee structures, but it’s still important to ask potential advisors detailed questions about what commissions they earn and how they’re compensated.

Need help finding a financial advisor? Use SmartAsset’s free advisor matching tool and connect with fiduciary advisors who serve your area.

Understanding Financial Advisor Commissions

Financial advisors typically fall into two main compensation categories. Commission-based advisors earn money when clients purchase financial products they recommend, such as mutual funds, insurance policies, or annuities. Fee-only advisors, by contrast, charge directly for their services through hourly rates, flat fees, or a percentage of assets under management. This fundamental difference can significantly impact the advice you receive and the relationship you build with your advisor.

Most commission structures range from 1% to 6% of the investment amount, varying widely by product type. Insurance products like annuities typically carry higher commissions, sometimes reaching 5-6% of your premium. Mutual funds often include front-end loads (paid when purchasing) or back-end loads (paid when selling), usually between 1-5%. Understanding how financial advisor commissions work helps you recognize potential conflicts of interest that might influence recommendations.

Commission-based compensation can create inherent conflicts. Advisors may have incentives to recommend products with higher commissions rather than those best suited to your needs. Some firms offer additional incentives like bonuses or trips to advisors who meet sales targets for specific products. These arrangements don’t automatically mean you’ll receive poor advice, but they’re important factors to consider when evaluating recommendations.

Regulations require financial advisors to disclose their compensation methods, though the level of transparency varies. Registered Investment Advisors must provide a Form ADV that outlines their fee structure. Broker-dealers follow different rules but must recommend suitable investments. Always ask potential advisors to explain exactly how they’re compensated and what percentage of their income comes from commissions versus fees.

What Is a Fee-Based Advisor?

However, some advisors follow what’s called a fee-based model. This means they receive client-paid fees for the advisory services they provide, as well as compensation for selling third-party products, like insurance and securities. As a result, fee-based advisors act both as fiduciaries and sales representatives. This is where things can get murky, because fee-based advisors must follow separate professional standards related to each role.

Previously, representatives of broker-dealers were held to a less stringent standard than fiduciaries. Known as the suitability standard, this rule required these advisors to make recommendations that were “suitable” for the client based on their financial profile. However, the suitability standard did not require advisors to prioritize the client’s best interest over their own, meaning an advisor could recommend a higher-fee product as long as it meets the suitability criteria, potentially creating conflicts of interest.

That’s changed since the Securities and Exchange Commission (SEC) rolled out Regulation Best Interest (Reg BI), established by the SEC in 2020, raising the standard for brokers and advisors by requiring them to act in the best interest of their retail clients. Under Reg BI, advisors must disclose conflicts, consider costs and avoid incentives that may compromise their objectivity. However, some critics have argued that Reg BI hasn’t gone far enough to protect consumers.

What Are the Sources of Financial Advisor Commissions?

Financial advisors can receive commissions from a range of investment products. These commissions usually come in the form of a percentage of the sale value of the product. Commission-based arrangements are often based on some relationship an advisor has with a company, which is why they can sometimes cause concerns with conflicts of interest.

Here’s a breakdown of some common areas in the financial services industry where you’ll run into commissions:

• Insurance products: There can be big incentives associated with selling insurance products. Some advisors may see commissions as high as 70% of the first year’s premium. After that, they may receive an additional 3% to 5% of the premium per year as long as the policy is active.
• Mutual funds: Typically, advisors making commissions on mutual funds get paid via a trailer fee. This commission can range from 0.25% to 1% of the assets invested in the fund on an annual basis. The advisor may receive this fee as long as the investment remains in the mutual fund.
• Annuities: Annuity commissions are generally built into the price of the contract. Commissions usually range anywhere from 1% to 8% of the entire contract amount, depending on the type of annuity. For example, fixed-indexed annuities generally earn advisors a commission between 6% and 8%, according to Annuity.org.

The Case Against Commission-Based Advisors

There are a few potential disadvantages to working with a commission-based financial advisor. For one, there’s always the worry that they may recommend you purchase a product because it benefits them financially. For instance, it might not be suitable for your risk tolerance or financial goals. If your financial advisor relies solely on commissions to make a living, this may put your best interests in jeopardy.

Since these advisors receive a one-time commission for the sale, they may not offer the same long-term attention that you might want for your finances. So, unless you’re buying a product that doesn’t require regular transactions, you may want to find an advisor who’s amenable to maintaining an ongoing dialogue with you.

Additionally, financial advisors who work for investment brokers or insurance agencies are often more concerned with sales. So while they may abide by the suitability or even fiduciary standard, their allegiance may be to their employer’s bottom line.

One good thing to remember, though, is that many registered financial advisors don’t receive payment from commissions alone. Beyond that, if an advisor has a certification or designation, they may have an independent fee structure. Additionally, SEC- or state-registered advisors must abide by fiduciary duty, putting your interests above all else in the process.

Many people avoid commission-based advice by choosing advisors who are paid a percentage of the assets they manage. Wondering if that’s worth it? This calculator shows how your net worth could differ with and without an advisor.

Bottom Line

Before selecting a financial advisor, it’s essential to understand what commissions financial advisors earn and how their compensation model might influence their recommendations. Ask potential advisors direct questions about their fee structure, potential conflicts of interest, and whether they adhere to a fiduciary standard. Remember that the lowest-cost option isn’t always the best — the value comes from finding an advisor whose compensation structure aligns with your financial goals and who provides advice worth more than what you’re paying.

Tips for Finding a Financial Advisor

• If you don’t already have one, finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Consider a few advisors before settling on one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.
• Worried about the costs of hiring a financial advisor? Consider using a robo-advisor instead. Robo-advisors typically require less investment and charge lower fees, making them a better option for people with less money to invest.

Next Steps

Do you want to learn more about financial advisors? Check out these articles:

• How to Choose a Financial Advisor?
• How Much Does a Financial Advisor Cost?
• How Do Financial Advisors Make Money
• Are Financial Advisor Fees Tax Deductible?
• Is It Worth Paying a Financial Advisor 1%?

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