Financial advisors can make a great living by advising clients on how to manage their money best. However, how do financial advisors make money? This article will explore how financial advisors make money and how they get paid. We will also look at the different types of commissions and fees that they may charge.
Salaries
Most financial advisors work for firms that pay them a salary. According to the US Bureau of Labor Statistics, the average salary for financial advisors was $89,160 in 2018. The highest-paid 10% of financial advisors earned more than $208,000 that year, while the lowest-paid 10% earned less than $39,410.
However, financial advisors who work independently or have their firm may not earn a salary. Instead, they may make money solely through commissions and fees.
Commissions
One way that financial advisors can make money is through commissions. Commissions are typically based on the products they sell, such as investment products, insurance policies, or annuities. Financial advisors may also earn commissions selling other financial products, such as mortgages or loans.
Commission rates can vary significantly, depending on the product sold and the financial advisor’s firm. For example, insurance commissions can range from 5% to 20%, while investment commissions may be 1% to 2%.
Some financial advisors may earn a commission on every product that they sell. Others may only make a commission on certain products, such as investment products. And still, others may receive a mix of commissions and fees.
But how do financial advisor firms set their commission rates? There are a few different ways. Some firms may have a set commission schedule that they charge for each product. Others may have negotiable rates, meaning that the financial advisor can try to negotiate a higher commission with the firm.
And finally, some firms may offer their financial advisors a lower commission rate in exchange for selling a certain amount of product each month or year. For example, a firm may offer a 3% commission rate on investment products, but if the financial advisor sells $1 million worth of products per month, the commission rate may increase to 4%.
Fees
Another way that financial advisors can make money is through fees. However, there are multiple types of fees that financial advisors may charge, and the type of fee will typically depend on how the advisor is paid.
Percentage of assets: Some financial advisors may charge a percentage of assets under management (AUM). For example, if an advisor has $100 million in AUM, they may charge 1%, which would be $1 million.
Hourly Rate: Another type of fee that financial advisors may charge is an hourly rate. Financial advisors typically charge between $100 and $300 per hour.
Flat Fee: Some financial advisors may also charge a flat fee, meaning a set amount for their services, regardless of how much time they spend or how many assets they have under management. For example, a financial advisor may charge a $2,500 flat fee for creating and implementing a financial plan.
Retainer Fee: Some financial advisors may also charge a retainer fee. A retainer fee is an upfront fee that is paid in exchange for the advisor’s ongoing services. For example, a financial advisor may charge a $5,000 retainer fee to review a client’s portfolio and recommend improving it.
Selling Products
In addition to commissions and fees, financial advisors may make money by selling products, such as investment products, insurance policies, or annuities. Financial advisors who work for firms typically make a commission, while financial advisors working on their own earn the entire sale price.
For example, let’s say a financial advisor selling insurance policies charges a 10% commission. If they sell a $1,000 policy, they will earn $100. But if they sell an investment product for $1,000, they may only earn a 1% commission, or $10.
Furthermore, financial advisors who work independently develop other products such as webinars, books, or financial planning software. They then sell these products to their clients to increase their revenue.
Conclusion
There are many different ways that financial advisors can make money. Financial advisors typically earn a salary, commissions, and fees. They may also sell products, such as investment products, insurance policies, or annuities. And finally, financial advisors who work on their own may develop and sell other products, such as books or financial planning software.