One of the most important aspects of hiring a Wealth Manager is understanding how the advisor is compensated. The landscape of compensation in investment management has drastically changed over the years and I am going to discuss the two most common ways investment managers get paid.

• Commission-Based
• Fee-Only

You should pay close attention to how your advisor is being compensated. Let's dive in. 

Commission Based Advisors

As the name suggests, commission-based advisors are compensated by commission, but who pays that commission? In this scenario, the financial advisor is paid from the product they sell. In other words, they may invest a client’s assets into a certain mutual fund and the mutual fund itself sends the advisor a commission for that placement.

Pros:

• No out of pocket expense to the client, the fee structure is wrapped up in the price you pay to invest in that product (mutual funds, insurance, annuities, etc)

Cons:

• Could be a conflict of interest to the client. In this scenario, it is possible the advisor is favoring one company over another due to the commission they are paid. Therefore, the advisor MAY not be acting in the client’s best interest but their own.
• Not clear how much client is paying in fees. When the fee is wrapped up in the cost of the product, it might be difficult to fully understand what the net fee is to the client.
• Not clear how much advisor is being paid. The advisor pay structure is not as transparent in this model.

Presently you will find most advisors who hold an insurance license to be commission based or at least operate as a Hybrid RIA (which is a combination of fee-based and commission-based and is not discussed here). The insurance industry is slowly moving towards offering products- insurance and annuities- for Fee-Based advisors as well. 

Fee Only Advisors

Considering the Commission-Based model above, a new model started to emerge in the 1980s and has slowly been gaining traction since. The Fee-Only Advisory model has shifted away from selling products for commissions to simply selling advice for a fee. This fee is typically based on the assets you allow them to manage. In this business this is what is known as AUM, which stands for Assets Under Management. Usually this fee is tiered, starting high and going lower as the AUM goes up. For example, you may see 1% on the first $1,000,000 and 0.90% on the next and so forth.

Pros:

• Very transparent for the client. You pay x% of x$ amount in AUM.
• Allows the advisor to maintain the fiduciary standard. They are free to choose the best solution to meet the client’s needs.
• Transparent advisor compensation. Client can easily calculate exactly how much the advisor is being compensated on their assets.
• With increased transparency, this drives the net cost to clients down.

Cons:

• This author believes there are no ‘Cons’ to this model. 

Conclusion

The price you pay for investment management can affect your portfolio over time. I urge you to ask your advisor for a fee breakdown so you can determine exactly how much you are paying for advice. Find an advisor dedicated to Fee-Only wealth management so you can be confident in knowing how your advisor is compensated. 

Momentum Private Wealth Management  is proud to be a Fee-Only Registered Investment Advisory Firm (RIA). In fact, Austin is a member of the   XY Planning Network  which was specifically created for advisors to operate a Fee-Only RIA in a fiduciary manner and expanding access to Financial Planning to everyone.

Austin is also a member of  NAPFA - National Association of Personal Financial Advisors, another association of Fee-Only financial advisors. You can read more about each by clicking the links and you can see Austin’s profile for each here  XYPN  and here  NAPFA .
​
Do you know how much YOU are paying for wealth advice? Contact me to set up a complimentary review of your portfolio and fees. 

If you are not having frequent conversations with your wealth or investment advisor about market strategies, investment management, or financial planning opportunities, you should be, especially in a market like this! Momentum Private Wealth Management  specializes in Wealth Management as well as Comprehensive Financial Planning. Feel free to reach out to Austin directly at 512.416.8085 or austin@momentumpwm.com. You can also find out more information about MPWM at: www.momentumpwm.com.

You can also read more about Austin on his  LinkedIn Page ,  CFP® Professional Certificate Page , his  NAPFA Page  or on his  XY Planning Network Profile page. ​​

The information on this site is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Momentum Private Wealth Management, LLC (referred to as “MPWM”) disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose.
 
MPWM does not warrant that the information will be free from error. None of the information provided on this website is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall MPWM be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the materials in this site, even if MPWM or a MPWM authorized representative has been advised of the possibility of such damages.
 
In no event shall MPWM have any liability to you for damages, losses, and causes of action for accessing this site. Information on this website should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.