Generally financial advisors are paid either by charging fees or earning commissions.
Commission-Only Advisors earn their income by selling financial products such as insurance or mutual funds, or may also earn a fee for stock trades that they execute.
Fee-Only Advisors earn their income by charging fees and do not accept any other income in connection with a client relationship. Some common methods include an hourly rate, an annual or retainer fee or as a percentage of investments under management. You can find the elite Fee Only Financial Advisors at the National Association of Personal Financial Advisors.
"Fee-Based" Advisors or Hybrid Advisors earn their income using a combination of fees and commissions.
It may seem like semantics but it is very important to know how your Advisor is being paid and all the costs you are incurring. Most advisors don't tell you what fees you are paying unless you ask. Be sure to find out about the fees, sales charges, loads, commissions or any other costs you may incur before you do business. Generally, compensation methods are not be as obvious they should be.
Loads: A "load" is another term for sales charge or commission. If you are buying an "A" share mutual fund there is an up-front sales charge of usually around 5%, but can be as much as 8%. A "B" share does not have an up-front charge, but requires you to own the fund for a certain period of time, typically 5 to 7 years, during which time you pay a higher expense charge internal to the fund. If you wish to sell the fund before then, you will pay a deferred sales charge at that time. You can use "no-load" mutual funds to eliminate these charges.
Expense Ratio: The expense ratio is the percentage of the total fund assets that is charged to the investor. These expenses include management fees, which are paid to the fund manager, and operating expenses and, of course, profits. Unfortunately, there is no free lunch.
12b-1 Fees: These are additional marketing and distribution fees that are added to a fund. These are a part of the calculation of the expense ratio and sometimes called a "hidden load." Generally, a portion of these fees is used to compensate financial advisors, so this is an additional expense you may not be aware of. The average expense ratio of a fund with 12b-1 fees is 1.21%, compared to 0.62% for funds without these fees.The precise percentage changes regularly depending on exactly what month the calculation is made. - 21511
Commission-Only Advisors earn their income by selling financial products such as insurance or mutual funds, or may also earn a fee for stock trades that they execute.
Fee-Only Advisors earn their income by charging fees and do not accept any other income in connection with a client relationship. Some common methods include an hourly rate, an annual or retainer fee or as a percentage of investments under management. You can find the elite Fee Only Financial Advisors at the National Association of Personal Financial Advisors.
"Fee-Based" Advisors or Hybrid Advisors earn their income using a combination of fees and commissions.
It may seem like semantics but it is very important to know how your Advisor is being paid and all the costs you are incurring. Most advisors don't tell you what fees you are paying unless you ask. Be sure to find out about the fees, sales charges, loads, commissions or any other costs you may incur before you do business. Generally, compensation methods are not be as obvious they should be.
Loads: A "load" is another term for sales charge or commission. If you are buying an "A" share mutual fund there is an up-front sales charge of usually around 5%, but can be as much as 8%. A "B" share does not have an up-front charge, but requires you to own the fund for a certain period of time, typically 5 to 7 years, during which time you pay a higher expense charge internal to the fund. If you wish to sell the fund before then, you will pay a deferred sales charge at that time. You can use "no-load" mutual funds to eliminate these charges.
Expense Ratio: The expense ratio is the percentage of the total fund assets that is charged to the investor. These expenses include management fees, which are paid to the fund manager, and operating expenses and, of course, profits. Unfortunately, there is no free lunch.
12b-1 Fees: These are additional marketing and distribution fees that are added to a fund. These are a part of the calculation of the expense ratio and sometimes called a "hidden load." Generally, a portion of these fees is used to compensate financial advisors, so this is an additional expense you may not be aware of. The average expense ratio of a fund with 12b-1 fees is 1.21%, compared to 0.62% for funds without these fees.The precise percentage changes regularly depending on exactly what month the calculation is made. - 21511
About the Author:
Charles L. Stanley CFP ChFC AIF is an author, educator, speaker and Fee-Only Financial Planner. You can get a copy of his Special Report: How to Protect Yourself from being Madoff'd and learn some simple and little understood techniques to protect your personal interests from "bad actor" Financial Planners.
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