What are the different compensation Models for Advisors for Ongoing Advice
Advisors are paid in many ways, and each way comes with positives and negatives. Now one thing to keep in mind is that all these models can have an advisor that calls themselves a fiduciary. That means they are required to act in a client’s best interests. But when you figure out how advisors are paid it could tell a different story.
One thing to keep in mind is that some advisors run models like this exclusively or they run a hybrid of these. Knowing how your advisor is paid not only by you but also the firm they work for is critical to figure out the incentives they have and what level of service you can see in the future.
Assets under management
This is the most common way advisors are currently paid. They take a percentage of the assets they manage. Let’s say it is about 1% on average. Some can be dependent on the amount of assets managed and the specific firms tier structure. This structure is common for saying when you do better, we do better.
Pros:
- Advisor is paid on assets not based on the products sold
- Advisor cannot churn an account for extra income
- With paying a consistent fee the hope is an advisor is still invested in helping the client (this one depends on how the advisor is paid by their firm which you should ask)
Cons
- As your account grows your fees do as well (generally outpacing inflation)
- Recommendations could be made to get more assets under management or keep assets under management
- Could have large minimum investment requirements
- Clients pay more simply for having more money not necessarily more complexity.
- Clients often don’t know what they’re paying because it’s deducted quietly.
Commission based advisors
Commission based advisors are paid based on activity in accounts generally or different types of products sold. A way to think of it is you buy a mutual fund and that mutual fund might have a large upfront cost.
Pros
- Fees could be lower long term if less trades are made
- If someone is trusted and full service, they can help with your insurance needs as well
- Good for individuals who might not be looking for ongoing planning
Cons
- Churning of accounts is more likely in these accounts (which means making excessive trades to make more commissions)
- Hard to know if the recommendation is unbiased
- Ongoing planning is rare unless another product is being sold
- If insurance products are sold you as well could end up buying insurance products you may not need due to the advisor receiving a large commission
- Advisors receive small trails from commission products sold so they might lose interest in clients who do not have new money being invested
Flat Fee/ Subscription Models
A flat fee or subscription model has started to become more common over the last few years. This structure charges a fee based on the amount of service offered rather than the account balance. So, the advisor does not make money off commissions or how much in assets they manage. But rather there is an agreed upon price upfront.
Pros
- Simple Transparent Pricing
- As your account grows with the market your fee does not
- No direct financial incentive to acquire new assets or make a trade on a clients account that is unnecessary
Cons
- Could be cost prohibitive with smaller account balances
- If there is less activity in an account, it could be more expensive than commission-based advisor’s long term
- Not tied to investment performance, some clients like the idea of “paying more only when I grow.”
Simple summary
Flat‑fee = pay for advice.
AUM = pay based on your account size.
Commission = pay when a product is sold.
Flat‑fee aligns with planning.
AUM aligns with asset gathering.
Commission aligns with product sales.
Ultimately each one of these pricing models has its pros and cons. Some firms have hybrid approaches or do one of these fees exclusively. But ultimately no pricing model is perfect to serve every type of client. The most important thing to know is how you pay the firm the advisor works at and then how that advisor then gets paid by that firm. You always want to know the incentive model of how someone is paid. This allows you to better understand why a recommendation might be made that does not sit right with you.