If you're thinking about working with a financial advisor, one of the things you need to consider is the cost. In other words, how does the financial advisor you're considering get paid and what is it going to cost you?
Financial advisors and financial planners have different fee structures that are generally fee-only, fee-based, and commission-based.
A fee-only financial planner could be referred to as a “no commission” advisor. A fee-only planner doesn't accept any fees or compensation based off the products that they sell you. Much like any other professional, fee-only planners are paid only for the advice that they provide to you as their client. This could mean they charge you an hourly fee for services, or calculate a retainer fee. Because a fee-only planner has no direct financial stake in the recommendations they provide to you they may be more encouraged to act solely on what they feel is in your best interest.
A commission-based broker works a bit differently than a fee-only planner in the fact that they're paid through the sale of certain products such as life insurance, mutual funds, and annuities. So instead of charging an hourly or flat rate fee for their services, they're compensated by the commissions earned off of specific products and transactions.
A fee-based financial advisor earns an asset-based fee, or in other words, a fee that is a stated percentage of the overall value of the assets that he or she is managing.
The key takeaway here is to always ask an advisor upfront how they will be compensated before you make a commitment to hire them. Discuss the benefits of the services they can provide to you as an individual, and based on your unique financial situation. By understanding the differences, you can make more informed decisions before hiring a professional to manage your financial portfolio.
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