Investment Managers And Commission: Who Benefits?

Investment managers are professionals who manage the money of individual investors, institutions, and funds related to pension plans. They are responsible for protecting the current value of investments, strategically growing them, and adjusting their clients' investment positions as needed. Investment managers can be compensated in a few different ways, including through fees, commissions, or a combination of both. The way an investment manager is paid can vary depending on whether they are fee-based, commission-based, or fee-only. Fee-based investment advisors typically charge an annual percentage of the client's portfolio value or an hourly fee for their services. Commission-based investment advisors, on the other hand, are paid by the financial companies whose products they sell to their clients. This has led to concerns about conflicts of interest and whether commission-based advisors always act in their clients' best interests. Fee-only advisors, as the name suggests, are paid solely by their clients and do not receive any commissions from product sales.

Investment managers' salaries

Investment managers are responsible for managing the money invested by individual investors, institutions, and funds related to pension plans. Their job is to protect the current value of those investments, choose the best way to grow them, and adjust their client's investment positions as needed.

Investment managers can be compensated in a few different ways. Firstly, they may be fee-based, meaning they charge the client an annual percentage of the value of the client's portfolio or an hourly fee for their services. Fee-based advisors often require a minimum account balance of $500,000 to $1 million. Secondly, they may be commission-based, meaning they are paid by the financial companies whose products they sell to their clients. Commission-based advisors are incentivized to engage in active trading and sell products, even if this may not be in the client's best interest. Lastly, there are fee-only investment advisors who are never paid a sales commission and are therefore incentivized to act in the client's best interest.

The average salary for an investment manager is $125,472 per year, with entry-level investment managers earning around $75,000 and experienced managers earning up to $197,000.

The income for an investment management firm typically comes from charging fees on the assets under the company's management. These fees are usually expressed as a percentage of the Net Asset Value (NAV) and vary based on the type of investment program offered. Management fees can also be specified as different rates for different amounts of assets under management. For example, a higher rate may be charged for managing assets between $10 million and $25 million, and an even higher rate for managing assets above $25 million.

In addition to management fees, investment management firms may also charge other fees such as 12b-1 fees for promotion, distribution, and marketing expenses, and platform fees for master trust/wrap account administrative services.

Commission structures

Investment managers may receive commissions depending on the type of investment advisor they are. There are two main types of investment advisors: fee-based (or fee-only) and commission-based. Fee-based advisors collect a pre-agreed fee for their services, which can be a flat retainer or an hourly rate for investment advice. If they are actively managing a client's portfolio, they will typically charge a percentage of the assets under management (AUM). A small percentage of their revenue can come from commissions paid by brokerage firms, mutual fund companies, or insurance companies when the advisor sells their products. Fee-only advisors, on the other hand, are paid exclusively by their clients and do not receive any commissions for selling products.

Commission-based investment advisors, on the other hand, earn their income entirely from selling products to their clients. This can include investments such as insurance packages and mutual funds. The more transactions they complete or accounts they open, the higher their earnings. Commission-based advisors can be paid on a declining percentage basis over multiple years. For example, a wholesale rep may receive commissions for a period of 2 years after an account is opened, with the rate of commission varying depending on the year.

It is important to note that the investment management industry is highly regulated, and there is controversy over who can be commissioned for what activities. Legal and accounting advice should be sought before deciding on a plan. Additionally, commission-based advisors may not always act in the best interests of their clients, as they do not have a legal duty to them. Instead, they have a duty to their employers, such as brokers or dealers.

Fee-based vs commission-based

Investment advisors can be compensated in two main ways: they can be fee-based or commission-based. Fee-based advisors are typically paid by the client, either as a flat retainer, an hourly rate, or a percentage of the assets under management (AUM). They may also receive small commissions from brokerage firms or insurance companies when they sell products. On the other hand, commission-based advisors are paid by the financial companies whose products they sell to their clients. Their income is earned from the products they sell and the accounts their clients open.

Fee-based advisors may require a minimum account balance of $500,000 to $1 million. They may also be identified as certified financial planners (CFP) or chartered financial analysts (CFA), indicating that they are fiduciaries. As fiduciaries, fee-based advisors have a legal responsibility to always act in their client's best interests and cannot sell their client an investment product that goes against the client's needs, objectives, and risk tolerance.

Commission-based advisors, on the other hand, are not required to be fiduciaries. Instead, they are held to the "suitability standard," which means they can only buy and sell products they believe are suitable for their client's objectives and situation. This standard is fairly subjective, and advisors are not legally obligated to disclose conflicts of interest to their clients. Commission-based advisors have an incentive to engage in active trading and sell products, even if it is not in the client's best interest, as this increases their income.

There are advantages and disadvantages to both types of compensation structures. Commission-based advisors may be more suitable for investors with smaller portfolios that require less active management, as there is little gain in paying a percentage fee every year. Fee-based advisors, on the other hand, may be more suitable for investors with large portfolios who need active asset management. Additionally, fee-only advisors are often seen as more expensive than commission-based advisors, as their fees can eat into the investor's returns as the portfolio grows over time.

Pros and cons of each approach

There are two main ways that investment advisors are compensated: fee-based or commission-based. Fee-based advisors can be further divided into fee-only and fee-based (who also receive small commissions).

Commission-Based Advisors

Commission-based advisors are paid by the financial companies whose products they sell to their clients. They are paid mostly or entirely from the products they sell or the accounts their clients open. The more transactions they complete or the more accounts they open, the more they are paid.

Pros

• Commission-based advisors can be suitable for investors with smaller portfolios that require less active management.
• They are often cheaper than fee-based advisors.

Cons

• Commission-based advisors have an incentive to engage their clients in active trading, even if this is not in the client's best interest.
• They may sell products that are not optimal for the client.
• They are not legally obligated to disclose conflicts of interest to clients, so unsuitable financial decisions can be hard to identify.
• It can be difficult to know whether a particular investment is the best option or if the advisor is simply trying to increase their commission.

Fee-Based Advisors

Fee-based advisors charge the client an annual percentage of the value of the client's portfolio or an hourly fee for their services. Most of the income is paid by the client, but a small percentage can come from commissions on the products they sell.

Pros

• Fee-based advisors have a fiduciary duty to their clients and must always put the client's best interests first.
• They must disclose any conflict of interest.
• They are paid at a predetermined rate, so there is no incentive to keep a portfolio in flux.

Cons

• Fee-based advisors often require a minimum account balance of $500,000 to $1 million.
• They are often more expensive, especially as a client's portfolio increases over time.
• The client still has to pay brokerage commissions and custodial fees.

Fee-Only Advisors

Fee-only advisors are paid exclusively by their clients and never receive a commission for selling a financial product.

Pros

• Like fee-based advisors, fee-only advisors have a fiduciary duty to their clients and must always put the client's best interests first.
• They must disclose any conflict of interest.
• There is no incentive to keep a portfolio in flux.

Cons

• Fee-only advisors are often seen as more expensive than commission-based advisors.
• The fees can eat into the investor's returns, especially as the portfolio grows over time.
• The client still has to pay brokerage commissions and custodial fees.

Legal and regulatory considerations

The investment management industry is highly regulated, and legal and accounting advice should be sought before deciding on a plan. There is significant controversy over who can be commissioned for what activities. Investment advisors may be fee-based or commission-based, and it is important to understand the differences between the two before making a decision.

Fee-based investment advisors charge the client an annual percentage of the value of the client's portfolio or an hourly fee for their services. They may actively manage a client's portfolio and charge a percentage of the assets under management. Most of their income is paid by clients, but a small percentage may come from commissions earned from brokerage firms, mutual fund companies, or insurance companies when they sell their products. Fee-based advisors often require a minimum account balance of $500,000 to $1 million.

Commission-based investment advisors are paid by the financial companies whose products they sell to their clients. Their income is earned from the products they sell or the accounts their clients open. The more transactions they complete or accounts they open, the more they earn. They are not legally required to disclose conflicts of interest to clients, and the suitability rule, which mandates that they act in the interests of their clients, is highly subjective.

In 2016, the Department of Labor's (DOL) Fiduciary Rule mandated that all those managing or advising retirement accounts comply with a fiduciary standard, putting the client's best interests first and being honest about compensation and recommendations. This rule was never fully implemented and was rescinded in 2018.

It is important to note that commission-based advisors can be suitable for investors with smaller portfolios that require less active management, as there is little gain for them in paying a percentage fee every year. On the other hand, fee-based advisors may be more suitable for investors with large portfolios who need active asset management.

Wrap accounts, where a brokerage manages an investor's portfolio in exchange for a flat quarterly or annual fee, can protect investors from over-trading by their brokers. This structure ensures that the broker only trades when it is advantageous to the customer.

Frequently asked questions