As a financial advisory firm owner, you must find the right compensation models for your growing firm. There are various options to choose from, each with benefits and drawbacks.
This article will explore five compensation models used by a financial advisory firm.
Fee-Based
The fee-based compensation model is a popular choice for financial advisors. Under this model, the advisor charges a fee for their services, typically a percentage of the assets under management. In addition to these fees, the financial advisor may also receive commissions or referral fees.
The benefits of this model include aligning the advisor’s and client’s interests and the potential for increased revenue as the firm grows. However, this model can also be expensive for clients and may incentivize the financial advisor to take on more risk.
An example of a fee-based financial advisor compensation model is charging 1% of assets under management. Additionally, the employee may get a commission of 0.25% on any new investments made by clients.
Fee-only
The fee-only compensation model is similar to the fee-based model, but the financial advisor does not receive any commissions or other forms of compensation. This model is often seen as more transparent and fair to clients, as there are no hidden fees or commissions. However, this model can also be more expensive for financial advisory firms, as they must rely solely on fees for revenue.
Commission-Based
The commission-based compensation model is a popular choice for financial advisors who sell financial products, such as insurance or investments. Under this model, the financial advisor receives a commission on any products they sell to clients. In addition to these commissions, the financial advisor may also receive a salary or bonus.
The benefits of this model include the ability to generate revenue from product sales and the potential for increased income as the firm grows. However, this model can also be challenging to manage, as it may incentivize financial advisors to sell products that are not in the best interest of their clients.
An example of a commission-based financial advisor compensation model is charging a 5% commission on any insurance policies sold to clients. In addition, the financial advisor may also receive a salary of $50,000 per year.
Hourly Rate
The hourly rate compensation model is popular for financial advisors who provide consultation or planning services. Under this model, the financial advisor charges an hourly rate for their services. In addition to these fees, the financial advisor may also receive a salary or bonus.
The benefits of this model include not charging the client extra fees and the ability to generate revenue from consulting services. However, this model can also be challenging to manage, as it may incentivize financial advisors to work more hours than necessary.
An example of an hourly rate financial advisor compensation model is charging $100 per hour for consultation services.
Salary
Finally, the salary compensation model is a popular choice for financial advisors who are employees of a financial advisory firm. Under this model, the financial advisor receives a salary from the firm, typically an annual salary. In addition to this salary, the financial advisor may also receive a bonus or commission.
The benefits of this model include stable income and the ability to generate revenue from product sales or commissions. However, this model may not encourage financial advisors to work harder unless they get a good commission.
An example of a salary financial advisor compensation model is an annual salary of $50,000. In addition to this salary, the financial advisor may receive a 5% commission on any products sold to clients.
Select Your Compensation Model
As you can see, there are a variety of financial advisor compensation models that you can choose from. The best model for your firm will depend on several factors, including the type of services you provide, your size, and your growth goals. Ultimately, the goal is to find a compensation model that motivates financial advisors to deliver quality services and grow your firm. Hopefully, this article helped you figure out which compensation model you should use for your business.