Financial Advisor Compensation Mechanisms

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DrWealth
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Joined: Wed Apr 01, 2015 8:18 am

Financial Advisor Compensation Mechanisms

Post by DrWealth » Wed Dec 05, 2018 6:13 pm

Hi All,

I’d like to more fully understand financial advisor compensation. I’ve done some digging on this site, but haven’t really seen a full list. For those more knowledgeable about the industry, can you provide some input on the sources of income/ revenue for financial advisors?

This is not necessarily a question geared towards hedge fund managers. I’m more interested in your everyday financial advisor. I understand many advisors begin salaried and as they grow their business their compensation changes from salary to the below income streams.

Assets Under Management (AUM) – annual fees charged based on amount managed by advisor. Typically, 1%+-, percentage falls as assets increases. Is this the same thing as a wrap fee for those advisors offering estate and tax planning, among other services.

Added question on AUM – different institutions offer different products – I assume some have advisor managed portfolios and some offer more robo-advisor type portfolios the advisor simply puts the client’s money into. I assume AUM charges vary based on platform, any guidance on how certain companies treat/ charge/ compensate this?

12b-1 fees – fees earned by advisors for putting client’s money into certain mutual funds. Ex. I am aware companies like American Funds utilize 12b-1 fees. How much can the average advisor expect to earn from these fees, a few bps?
Side note: If an advisor uses funds like American Funds, is that by itself a red flag. (American Funds used as an example given the seemingly aversion from this community.)

Load charges – If a mutual fund has front end load charges, does the advisor also get a portion of the load charge from the mutual fund company, or is this simply part of the 12b-1 charges?

Insurance – Many advisors also sell life insurance. I assume the advisor receives a percentage of the policy value each year? I also assume whole/universal policies pay the advisor more than term policies.

Other – For more complicated investments (e.g., structured notes, REITS, alternative investments), I assume the advisor receives some sort of kickback from the company selling the product.

Fee-only – for those advisors charging fees not tied to assets under management, how is this done? Is it an hourly charge akin to lawyers? Is it an automatic reoccurring charge annually/ quarterly whereby the client supposedly receives continued investment advice and planning whenever they request? I understand that many under this model still manage assets, but simply charge a fee not tied amount of assets.

Any additional detail or additional revenue mechanisms would be appreciated.

This site is my trusted source for financial information, thank you for your input and continue guidance through life’s financial decisions.

Dr. Wealth
DW

Benjamin Buffett
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Joined: Sun Nov 25, 2018 2:20 pm
Location: Indiana

Re: Financial Advisor Compensation Mechanisms

Post by Benjamin Buffett » Wed Dec 05, 2018 7:29 pm

Good old fashioned commissions can creep in, money transaction fees, fees for inactivity, fees for selling too soon, fees for buying a non-discounted or supported fund, fees for buying an outside mutual fund, can all find their way into an advisor's (or his employer's) pockets. There is a moat of fees that and expenses that can kick in. Some are bond purchases, a mark up and type of "kick back" to the FA can occur. These are some of the ones I have stumbled across.

I am sure there are countless more that can hide in an asset's mark up. With some its easier just to see the price of an asset from another provider and see if the payment you need to buy it matches up. Some fees are so hidden its virtually impossible to spot them.

Desert
Posts: 131
Joined: Thu Nov 11, 2010 7:21 pm

Re: Financial Advisor Compensation Mechanisms

Post by Desert » Wed Dec 05, 2018 8:28 pm

Fee-only can include the following:
1. Project based: For example, a comprehensive financial plan for $2,500.
2. Hourly based: $250 per hour (Garrett Financial Network, for example)
3. Subscription (sometimes referred to as "retainer"): Monthly/quarterly/annual fee for ongoing financial advice. Organizations encouraging this form of compensation include XY Planning Network and Alliance of Comprehensive Planners.

averagedude
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Joined: Sun May 13, 2018 3:41 pm

Re: Financial Advisor Compensation Mechanisms

Post by averagedude » Wed Dec 05, 2018 8:39 pm

Drwealth, these are some good questions and i am looking forward to the answers from a salesperson in this industry. Im sure we both understand that there are many people who know nothing about investing and this is why they seek out professionals. I have a family friend that is a doctor and when the subject of investing came up, he told me that "he had a guy". That is the same thing i tell my wife when we need something fixed, and she tells me "hell no".

Grt2bOutdoors
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Location: New York

Re: Financial Advisor Compensation Mechanisms

Post by Grt2bOutdoors » Wed Dec 05, 2018 8:56 pm

The starting salary of an FA is not that large, many FA’s wash out of industry because they fail to earn enough to survive after salary stipend expires, typically 2 years later. Financial service companies will cut the strings if production targets are not met.

Your list was good but add to it, selling affiliated products and receiving a “referral fee” for it. Products like real estate mortgages, lines of credit backed or collateralalized by clients portfolio, private banking or estate planning services. The actual sale is closed by those affiliates, not the FA. After sale is closed, FA is credited with a referral fee. Amounts vary per product and is taken from affiliates as a “cost of doing business”. You as client will never know or be able to calculate the cost as it is proprietary and it’s structure will vary from firm to firm.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Mr.BB
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Re: Financial Advisor Compensation Mechanisms

Post by Mr.BB » Wed Dec 05, 2018 9:03 pm

Fees will vary with every company. It's the one's you don't even think about that will add up. I think Edward Jones will charge you $2.00 a transaction for dividend distribution (even if it is back into your own account). Imagine having to pay someone for something that should be done automatically.
"We are what we repeatedly do. Excellence, then, is not an act, but a habit."

123
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Re: Financial Advisor Compensation Mechanisms

Post by 123 » Wed Dec 05, 2018 9:19 pm

As an example Schwab publishes detailed information about their compensation programs: https://www.schwab.com/public/schwab/nn ... isclosures

Their compensation system is complex and it takes some digging through multiple layers to see all the ways that fees, commissions, and employee compensation can be buried in financial products. Remember Scwab is a low-cost broker, lots of other places will have higher costs and undoubtedly will be less transparent.
The closest helping hand is at the end of your own arm.

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arcticpineapplecorp.
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Re: Financial Advisor Compensation Mechanisms

Post by arcticpineapplecorp. » Wed Dec 05, 2018 9:48 pm

you can read some at www.kitces.com

I did a search for "compensation" there and found links to these blog posts:

https://www.kitces.com/?s=compensation
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

alex_686
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Re: Financial Advisor Compensation Mechanisms

Post by alex_686 » Wed Dec 05, 2018 10:08 pm

It has been 15 years since I worked in compensation, but the general rule of thumb is 50% of the revenue goes to the FA, the other 50% goes to the branch office and the firm. Some FA pull in only 30^, high earners can keep 70%.

Also depends on the product, and ehat mixture the firm is pushing - so ir changes from year to year.

DrWealth
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Joined: Wed Apr 01, 2015 8:18 am

Re: Financial Advisor Compensation Mechanisms

Post by DrWealth » Thu Dec 06, 2018 11:16 am

arcticpineapplecorp. wrote:
Wed Dec 05, 2018 9:48 pm
you can read some at www.kitces.com

I did a search for "compensation" there and found links to these blog posts:

https://www.kitces.com/?s=compensation
Thank you for this link, I've been to his site a number of times, but haven't searched for this issue. Unfortunately, I still did not find a list of compensation mechanisms in those posts.

Curious to hear if there are any financial advisors out there that are willing to share some specifics to their compensation.

As much as this forum harps on the conflict of interest advisors have, how can a client fully understand the advisors conflict of interest until they understand all the ways the advisor is compensated?

Appreciate the responses.
DW

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