Financial Advisor Pay Overview: Financial advisor pay typically follows one of three methods:
- Commissions
- Assets
- Salary plus bonus
Commissions: Financial advisor paying based on commissions is the traditional method. This is shorthand for saying that clients are charged a fee, usually called a commission, for each security transaction made, whether to buy or to sell. The financial advisor, in turn, retains a portion of these commissions as compensation, usually through an intermediate process that converts commissions into a metric called production credits.
Financial advisor pay may vary by type of security sold, and typically the percentage he or she retains increases as the total commissions (or production credits) earned during the year increase. This is often referred to as the financial advisor's payout rate. The firm's matrix of payout rates typically is called its payout grid.
Assets: An alternative method for financial advisor pay is based upon the value of the assets in the client's account. This method, where available, usually is at the client's option. Clients who have more actively traded accounts tend to prefer this method, which will reduce their costs. Moreover, clients who prefer to pay based on assets see it as aligning the financial advisor's interests more closely with their own. That is:
- The financial advisor does not have an economic interest in excessive trading, called churning an account.
- The financial advisor, instead, has a direct economic interest in increasing the value of the client's account.
Asset-based fees normally differ based on the category of assets in the account, with cash drawing the lowest (or no) fee, fixed income being charged a higher fee, and equities the highest fee.
Salary and Bonus: Financial advisor pay in discount brokerage firms that offer no advice and simply fill orders for their clients typically is a straight salary with bonuses based on overall firm results. These brokers are financial advisors in a very limited legal sense.
Conflicts of Interest: When financial advisor is on a commission basis, there is a clear conflict of interest, given that pay is linked directly to generating transactions, rather than to investment performance. If financial advisor pay is based on assets, there may have some residual conflicts if thefee varies by asset type. However, such conflicts, overall, are much lower than with a commission-based or transaction-based compensation system.
Financial advisors who are willing to accept lower compensation as the cost of fulfilling their fiduciary responsibilities to clients may nonetheless face pressures from their employer to increase revenues. For example, financial advisors who anticipated the 2007-08 bear market and moved their clients' assets have met with resistance from their short-sighted employers in some cases.
Expenses: Note that financial advisors often are required to cover certain expenses, in entirety or in part, out of their own pay. These expenses may include such things as:
- Pay and benefits for sales assistants or other support staff
- Telephone
- Mailing
- Supplies
- Office equipment
- Internet usage
- Subscriptions
This list is hardly exhaustive, and the exact items of expense that may be charged to financial advisors vary by firm. Moreover, financial services firms are increasingly likely to raise expense charge backs as an alternative to decreasing rates on the payout grid. This is an indirect method of cutting financial advisor pay.
