Some advisors are paid an annual salary. These advisors usually work for a bank, trust companyTrust company A company that offers the same services as a bank, but can also manage estates, trusts and pension plans, which banks cannot do.+ read full definition or credit unionCredit union A non-profit financial institution whose members own and operate it. Members can borrow money at low interest rates and make deposits. Sometimes large organizations set them up for their members or employees. Offer services similar to a bank such as chequing and savings accounts.+ read full definition. They provide advice about the products their financial institution offers, which limits what they can recommend to you. They often help clients with one-time buying decisions, but can also provide ongoing assistance.
2. Sales fees or commissions
Some advisors earn a sales commission every time they buy or sell an investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition for you. If you buy a mutual fund, your advisor may also earn a trailing commission for as long as you own a mutual fundMutual fund An investment that pools money from many people and invests it in a mix of investments such as stocks and bonds. A professional manager chooses investments that match the fund’s goals for risk and return. You can redeem your fund units at any time.+ read full definition. This fee covers the cost of giving investment advice and providing other services to clients.
CommissionsCommissions What you pay to a broker or agent for their services. Often called a “sales commission”. For example, you pay a fee to someone who buys or sell stocks or real estate for you.+ read full definition come out of your investment and are paid by the firm your advisor represents. If your advisor is paid a sales commission, ask them if they’ll make more money recommending one investment over another. If they will, check that the investment they’re recommending is one that will help you reach your goals.
Fee-only advisors are paid directly by you. They don’t earn any commissions. They may charge a flat fee based on the services they provide to you, or they may charge you by the hour. Once you agree on the fees, you know what you’ll get and how much you’ll pay.
For example, an advisor may quote $300 to build a financial planFinancial plan Your financial plan should cover every aspect of your finances: saving and investing, paying down debt, insurance, taxes, retirement planning and estate planning.+ read full definition for you. For this price, you may get two sessions with them. In the first one, the advisor will gather information from you to make the plan. In the second, you’ll meet to review the plan. There would be no ongoing help after these two sessions.
Or, a fee-only adviser may charge an annual feeAnnual fee A fee that is charged on an annual basis. One common occurrence of an annual fee is the fee charged by credit cards.+ read full definition based on the size of your portfolioPortfolio All the different investments that an individual or organization holds. May include stocks, bonds and mutual funds.+ read full definition.
Fee-based advisors get paid through a combination of fees (paid by you) and commissions (paid by the firm they represent).
Watch this video to learn about the cost of investment advice for mutual funds.
4 key points
Advisors may be paid by:
- Sales fee or commission
- Fee only
- A combination of commissions and fees