Money matters can be stressful and confusing, and it’s one of the reasons why financial advisors exist – to help you navigate the complex world of personal finance. But have you ever wondered: how do financial advisors make money?
Like any profession, the earnings of financial advisors vary greatly depending on a number of factors, including their level of experience, the size of their client base, and the types of services they offer.
In terms of how financial advisors get paid, it comes down to whether or not they earn on commission or fees. So, whether you’re a curious consumer or an aspiring financial advisor, read on as we explore all the ways in which financial advisors earn income.
How Do Financial Advisors Get Paid?
Financial advisors get paid in several ways, depending on the type of service they provide and the fee structure they have established with their clients. Here are some of the most common ways financial advisors make money:
1. Commissions
A financial advisor with a commission structure or business model earns a percentage for selling financial products such as mutual funds or insurance policies. They may also earn commissions by facilitating financial transactions, like a stock trade.
So, how much commission do financial advisors make per source? Depending on the products they’re selling, a financial advisor’s commission may range from 1% to 10%. Naturally, some sources of commission pay better than others.
Insurance products, for instance, may bring as much as 70% of the first year’s premium. From mutual funds, advisors may earn between 0.25% and 1% of the asset invested. Commissions received on the annuity are typically included in the price of the contract and can be as low as 1% or as high as 10%.
2. Fees
Another way financial advisors get paid is by charging their clients fees for services such as wealth management or financial planning. Financial advisors typically charge an hourly rate, a flat fee, or assets under management (AUM) fees. Based on the compensation model, they can be classified into:
- Fee-based financial advisor
These advisors charge clients a fee for their services, which can be a percentage of the assets under management (AUM) or a flat fee. And despite the fact that most of the revenue of fee-based financial advisors comes from fees, they may also receive commissions for selling certain financial products like a mutual fund or an investment.
- Fee-only financial advisor
This type of advisor works by charging their clients a fee for the services they provide but do not sell products or earn any commissions. Fee-only financial advisors operate as fiduciaries and are obligated to put their client’s interests first. Typically they charge a flat or hourly rate or may charge a percentage of AUM which is the sum of the total value of investments that the financial advisor manages on behalf of the client.
3. Hybrid Model
Some financial advisors use a hybrid model that combines both a fee-based and commission-based system. This means that they charge a fee for their services and also earn a commission on the financial products they sell.
This is because a hybrid advisor is dually registered and can represent both a Registered Investment Advisor (RIA) entity and a Broker or Dealer (BD). By combining the two models, a financial advisor can earn commissions through a broker and leverage a corporate RIA to charge clients on a fee-based basis. In short, a hybrid model allows advisors to offer their clients lower fees while still earning commissions.
Understanding how financial advisors get paid is vital, as this can impact the advice they give. For instance, advisors who receive commissions may have the incentive to recommend products that pay them higher commissions. So before investing with a financial advisor, make sure to check if their interests align with yours.
Do Financial Advisors Get Paid a Salary?
Yes, most financial advisors are paid by receiving a monthly salary. According to data, the average annual salary paid to financial advisors with 1-2 years of experience is $63,210 and goes as high as $118,385 a year. In addition to the base salary, commission-based and some fee-only financial advisors may receive an extra $30,366 a year.
Other financial advisors work independently and may earn a salary from their own business, although this is less common. Most earn an income from the fees they charge clients for their services.
It should also be noted that salaries are not the only way financial advisors are paid. Some work for large financial institutions, such as banks or investment firms, and may receive a base salary plus performance-based bonuses. For instance, an entry-level financial advisor receives around $66,000 a year, while a senior financial advisor may earn a salary of $100,716 per year, which is closer to the average salary of lawyers.
How Much Do Financial Advisors Make?
The mean annual pay of financial advisors in the US is $94,170. According to data from the US Bureau of Labor Statistics, the mean hourly salary of people working as financial advisors is $45.27.
By place of employment, New York is the state with the top-paying annual mean salary for financial advisors at $158,040, the District of Columbia is second with $156,670, and Washington is third with $144,890.
Additionally, over the past 10 years, job openings for financial advisors have been growing by 30,500 a year, and as per the latest forecasts, the industry is expected to grow by 15% between 2021 and 2031. This means that the occupation of a financial advisor will grow at a much faster rate than others.