The Truth Behind How Financial Advisors Make Money

If you’re looking for help growing your assets, finding a financial advisor can seem like a no-brainer. After all, advisors charge a fee instead of taking a commission on your trades, so they must be trustworthy, right? Financial advisors are an important resource for many people. They offer valuable guidance and support when it comes to tackling your finances. Financial advisors help with things like planning for retirement and funding college savings plans for your child. The problem is that most people don’t understand how financial advisors make money. Before you hire anyone to help manage your money, there are some things you need to know about how financial advisors make money and what that means for you as their client. Let’s take a look at the truth behind how these professionals make money so you can decide if they’re right for you. Read on to discover more.

What is a financial advisor and how do they make money?

Financial advisors manage money for clients and make their living based on the services they provide. Most financial advisors fall into three categories. The first is a fee-based financial advisor. These advisors charge a fee for their services, usually a percentage of the assets they oversee. The second type is a commission-based financial advisor. These advisors are paid based on the number of trades they make on your behalf. The third type is an asset manager. This type of financial advisor will manage your assets and make their money based on a percentage of the assets they oversee. Fee-based financial advisors charge you a percentage of your assets under management as a fee. The amount you pay is typically based on a percentage of your assets or a flat rate, though there are other variations. Commission-based financial advisors are paid a percentage of the total amount invested in a trade. As you can see, these two models are very different and have vastly different implications for clients.

Conflicts of interest with financial advisors

One of the first things you’ll want to look out for when hiring a financial advisor is potential conflicts of interest. Financial advisors are required to disclose potential conflicts of interest to their clients, but many times it’s not clear. Here are a few examples of potential conflicts of interest between you and your financial advisor. - Your financial advisor might receive a higher commission for selling you a specific investment product or type of investment. This means that even though it might be a better fit for you, they may push you towards something that pays them more just to make more money from you. - Your financial advisor might sell you insurance or other financial products that make them a lot of money even if you don’t need it. - Your financial advisor might give you advice that is designed to help them make more money instead of genuinely trying to help you. - Your financial advisor might steer you towards certain investment products because they have lower fees and make them look better.

What’s a Registered Financial Advisor?

A Registered Financial Advisor (RFA) is someone who has been certified by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) as someone who can give financial advice. There are different ways to become a RFA, including completing an undergraduate degree in finance, earning a masters in financial services, and taking a series of exams. Once you’re a RFA, you have to complete ongoing continuing education to stay certified. Becoming a RFA is a great way to show clients that you are committed to helping them make the most of their money. You’ll be required to stay up to date on new financial developments and have a keen understanding of how the market works to best serve your clients. A potential client may ask if your financial advisor is a RFA and if not, may not be as trusting of the advice they’re receiving.

Commission-Based Financial Advisors

As we talked about above, a commission-based financial advisor receives a percentage of the total amount being invested in a trade. The financial advisor is paid a percentage of the amount being invested in the trade, so they have an incentive to make you trade as often as possible to make more money. Commission-based financial advisors are typically tied to investment firms. While these firms have thousands of investment products to choose from, you may notice that many of them are the same. While there are a few differences between them, many financial advisors only sell one or two types of investment products. If you’re only investing in one or two types of products, you’re missing out on a lot of other opportunities for growth. If you ever want to trade out of these products, you’ll have to pay a fee to do so and this could cost you a lot of money.

How Asset Managers Make Money

Asset managers are technically financial advisors, but they make their money by collecting a percentage of your assets they oversee. The amount they charge you varies widely depending on the firm you work with, your account size, and other factors. Some firms charge as little as 0.25% while others charge as much as 2%. While the amount you pay doesn’t necessarily mean the service is better, it does give insight into how the firm makes money. A firm that charges you a percentage of your assets is likely making money off of your growth as well. This can be a good thing, but if the market drops and your assets lose value, so does the amount you pay them.

Investment products: Be aware of potential conflicts of interest

When you’re investing, you want to be aware of potential conflicts of interest with your financial advisor. For example, if your advisor is heavily invested in company stocks, he or she may not be a great choice for you if the stock market is facing a downturn. A financial advisor who isn’t heavily invested in the stock market may be a better fit for your situation. One way to avoid this is to make sure you know what types of investments your financial advisor is investing in. If you don’t understand what investments your financial advisor is recommending, you may want to look for someone else who better understands your situation.

Conclusion

If you’re serious about growing your assets, you need to make sure you have a financial advisor who is making the best decisions for you. While it might be tempting to hire a commission-based financial advisor because they make more money off of more trades, you may regret it later when you’re not making the best investments for your situation. When choosing a financial advisor, make sure you understand how they make money so you can be confident they’re putting your best interests first. You can also protect yourself by making sure you read through your advisor’s fine print to understand what you’re signing up for.