How Investment Advisors Make Their Money

Investment advisors are financial professionals who provide investment recommendations and conduct security analysis in exchange for a fee. They are also known as stockbrokers and are regulated by their state or the Securities and Exchange Commission (SEC) depending on how much money they manage. Investment advisors may also offer services like retirement planning. They are not the same as financial advisors, which is a more general term for a financial professional. Investment advisors typically charge clients a percentage of the assets they manage, with an annual fee of 1% being typical. However, some investment advisors charge flat fees or hourly rates. When choosing an investment advisor, it is important to consider your financial needs and objectives, as well as their specialties and certifications.

Salary and bonuses

Financial advisors are typically paid a salary plus commissions on sales or fees charged to clients, and in some cases, they may be awarded bonuses based on performance. The median salary for financial advisors was $95,390 per year in 2022, but this can range from $46,700 to over $239,000. In 2023, the median salary rose to $99,580. The best-paid 25% of financial advisors made $169,910 that year, while the lowest-paid 25% made $65,320.

Financial advisors can be paid in several ways, including:

• Commissions: Advisors earn a percentage of the value of the product when they sell an investment product to a client.
• Fee-only: Advisors are paid directly for their services and do not sell products or accept commissions. They may charge an hourly rate, a fixed annual retainer, or a percentage of the value of the investment assets they manage.
• Fee-based: Advisors combine the commission-only and fee-only models, either selling investments and earning a commission or charging a fee based on a percentage of the value of the portfolio of assets they manage.

Some financial advisors may also receive a regular salary for working in a bank or financial institution, and they can also earn commissions or incentives for selling specific products.

The cost of a financial advisor's services depends on various factors, including the type of advisor, the fee structure they use, and the level of service provided. Robo-advisors, for example, typically charge lower fees than traditional human financial advisors. The most common fee structure is the AUM (assets under management) fee, which can range from 0.25% to 2% per year. Flat annual fees (retainers) typically cost between $2,000 and $7,500, while hourly rates range from $200 to $400. One-time financial plans often cost between $1,000 and $3,000, and commissions may be 3% to 6% of an investment.

Commission-based pay

One common approach is for investment advisors to charge a management fee based on the size or performance of the client's assets. This fee structure creates an alignment between the advisor's success and that of the client. The more the client's assets grow, the higher the advisor's fee will be. This model provides a clear financial incentive for the advisor to work towards the client's success. However, it is important to note that this arrangement can also be costly for the client, especially if the portfolio consistently underperforms or fails to generate returns.

Another model for commission-based pay is the fixed, fee-based approach, where investment advisors charge a percentage of the assets they manage, typically around 1% annually. This fee structure is common among investment advisors who have an ongoing relationship with their clients. While this model provides stability and predictability in terms of fees, it can also lead to higher costs as the advisor's fees increase with the growth of the client's assets.

Some investment advisors may also charge hourly or flat fees for specific services. These rates can range from $120 to $300 per hour, depending on the advisor's experience and the complexity of the services provided. This fee structure is often used by financial advisors who provide holistic financial planning services in addition to investment advice.

When selecting an investment advisor, it is crucial to understand their fee structure and how it aligns with your financial goals and objectives. Be sure to ask about their qualifications, fiduciary duties, and the services they offer to ensure they meet your specific needs.

Fee-only and fee-based models

Fee-only and fee-based are two of the most common models in the financial advising industry. While they sound similar, there are some key differences between the two.

Fee-only model

In the fee-only model, advisors are compensated directly by their clients for their services and do not receive commissions on the sale of financial products. Fee-only advisors typically charge a flat rate for their services, which can be an hourly rate, a retainer, or a percentage of the client's assets under management (AUM). This fee structure can range from $120 to $400 per hour, $1,000 to $10,000 or more as a fixed annual fee, and 0.5% to 2% of AUM. The specific fee arrangement is typically negotiated between the advisor and the client in advance to ensure transparency and customisation. Fee-only advisors are typically fiduciaries, which means they are legally required to act in their client's best interests and disclose any potential conflicts of interest. This model provides unbiased recommendations, transparency in pricing, and alignment of interests between the advisor and the client. However, it may result in higher costs for clients, especially those with substantial investment portfolios.

Fee-based model

Fee-based advisors are paid by their clients but may also receive additional compensation through commissions from the financial products their clients purchase. This creates a potential conflict of interest, as the advisor is incentivised to recommend products that generate higher commissions, which may not always be in the client's best interest. Fee-based advisors are typically not fiduciaries and are only required to recommend "suitable" investments to their clients. This model may offer a wider range of services and the opportunity to work with a single advisor for all financial needs. However, the potential for conflicts of interest and a lack of transparency in pricing are important considerations.

Hourly rates

The hourly rate for investment advisors typically ranges from $200 to $400 per hour. However, some rates can go as low as $150 per hour or as high as $450 per hour. These prices do not change based on your total assets managed, so you only pay for the time spent with the advisor.

Hourly-based financial advisors are ideal for those who want access to a professional to answer questions, offer reassurance, and provide suggestions for their own ideas. Additionally, these advisors can help build a financial plan, which you can then implement on your own.

It is important to understand the services provided by hourly financial advisors. Some advisors will give full-service management of your investment portfolio, while others will only bill for one-on-one time and leave the money management and investing to you, based on their guidance.

When considering an hourly financial advisor, it is recommended to get an upfront estimate of the number of hours you can expect to be billed based on your circumstances. For example, an advisor charging a $2,500 retainer fee at $250 per hour would provide 10 hours of planning services for the year, with each additional hour billed at the standard hourly rate.

Qualifications and experience

To become a successful investment advisor, one must possess a comprehensive understanding of the financial markets, economic trends, and investment products. A bachelor's degree in a related field such as finance, economics, or business administration is typically the minimum educational requirement. Advanced degrees or certifications, such as a Master of Business Administration (MBA) or a Chartered Financial Analyst (CFA) designation, can significantly enhance an individual's credentials and career prospects.

The CFA designation, in particular, is highly respected and widely recognized in the investment industry. It signifies a strong foundation in investment analysis and portfolio management. The CFA program covers a broad range of topics, including ethical and professional standards, securities analysis, quantitative methods, economics, financial reporting and analysis, and portfolio management. Obtaining the CFA charter demonstrates a commitment to excellence and a deep understanding of the investment field.

In addition to academic qualifications, practical experience is crucial for investment advisors. Entry-level positions often involve working as a research analyst or associate, where individuals can gain valuable knowledge about investment research, financial analysis, and industry trends. Developing strong analytical, critical thinking, and problem-solving skills is essential for interpreting financial data and making informed investment decisions.

Communication and interpersonal skills are also vital for investment advisors. They must be able to effectively convey complex financial concepts to clients and build strong relationships based on trust and confidence. Excellent communication skills enable advisors to understand their clients' financial goals, risk tolerance, and investment preferences, allowing them to provide tailored advice and strategies.

Furthermore, technological proficiency is becoming increasingly important in the field. Investment advisors should be comfortable using financial analysis software, portfolio management systems, and other tools that aid in investment research, performance monitoring, and client reporting. Staying abreast of technological advancements and industry trends helps advisors provide efficient and up-to-date services to their clients.

Frequently asked questions