How Is Your Financial Professional Getting Paid?

How Is Your Financial Professional Getting Paid?

If you’ve considered partnering with a financial planner, advisor, or broker — or did your research before choosing the financial professional you’re working with now — you might know that different pros charge their clients in different ways. Some charge a percentage fee based on the assets they manage for clients. Others may charge an hourly or even flat fee. Still others may earn a commission for selling clients a financial product and — in some cases — even earn fees at the same time.

With so many different compensation structures, it can be difficult to do an apples-to-apples comparison of financial professionals, their prices, and the value they offer to their clients. No one pricing method is necessarily better or worse than any other, but savvy investors know what they pay, how their pros are paid, and the value they receive from their financial advice relationships.

If you know what you pay your financial professional — or how much you would like to pay someone — but want to see the full picture of how he or she is compensated, read on to better understand the value your financial pro is offering you for the money, what that relationship is worth to you financially, and much more.

How financial pros are paid

There is no industry-wide standard for how financial professionals are paid. However, compensation structures tend to fall into three major categories:

1. Commission-based
One way financial professionals are paid is by commissions on the products they sell to their clients, like mutual funds, annuities, or insurance. Usually, these pros will — or at least should — use the titles “registered representative,” “agent,” or “broker.” The commissions turn into incentives for financial professionals who are paid this way: If they sell a client a more expensive policy, they can receive a bigger commission and, therefore, a bigger paycheck. Even still, the larger issue may lie in the lack of transparency involved. It’s often possible that the commission the broker is earning is unknown to the client, even though the financial product being bought and sold is structured to cover that compensation at the client’s expense. Of course, as the old saying goes: There are no free lunches.

2. Fee-based
Those who are paid on a fee-based platform typically will charge their clients fees — but can also receive commissions on products they sell, much like commission-based pros. While they’re not earning only commissions, the incentive of a bigger paycheck can still present a conflict of interest. Similar to commission-based advisors, the commission earned by a fee-based advisor is not always fully transparent. Complicating the matter further is the fee-based professional’s ability to switch hats from a fee to commission compensation structure at any time.

3. Fee-only
Lastly, we come to fee-only pros. There are many flavors of fee-only — whether hourly, flat, or a percentage of investments under their management, these professionals only charge and earn fees directly from their clients. They don’t sell products, so they can’t earn commissions on them. What this all means is that the fees such fee-only pros charge are their only sources of income. Perhaps best of all is the added transparency in that fact. If the fee is $X or Y%, the client can at least understand and explicitly agree to a specific cost at the outset of the relationship.

How much financial pros are paid

Commissions can range widely, and the commission-based or fee-based financial professional can earn varying percentages of the cost born directly or indirectly by the client. Some annuities can pay the commissioned agent 8% or more of the value of the contract the client purchases. Picture the purchase of a $100,000 annuity paying the agent $8,000 — it’s quite the compensation for a single transaction. At the same time, while the first statement might show the client that their purchase of $Z is worth $Z + interest, that money may be locked up for 15 years or more or the interest only available if taken as a series of payments.

Financial pros who operate on fee-only annual models tend to charge between $2,000 and $7,500 yearly for holistic, comprehensive financial planning. This can include everything from creating an initial financial plan and managing assets to regularly reviewing investment portfolios and preparing taxes for clients. It’s an all-inclusive fee for all things financial planning, and advisors can often break up the annual cost into quarterly or even monthly payments for their clients’ convenience.

Those who base their fees on investments or assets under management (AUM) may only manage or advise their clients on those assets. Others, however, may offer additional services free of charge or under a fee-plus-AUM model, charging a fee for planning plus a percentage on the assets they manage. The average percentage clients pay for these services is 1% of AUM.

An example

But how, you ask, do you make an effective cost comparison between a professional who charges a fee expressed as a percentage and another who charges a fee expressed as a dollar amount?*

To keep things simple, let’s say you’ve got a cool $1 million that you would like some help managing. You also want financial planning services to go along with it so you’ll have a solid idea of where that money will get you from today through your many financial goals. You’ve been interviewing financial pros and found two who you think will suit you well — but one provides a quote based on a percentage of AUM while the other quotes services for a flat fee. How can you compare their pricing structures?

Fee-Only Pro A quotes a flat annual fee of $7,000 a year for a suite of services including financial planning, investment management, and income tax preparation. In this scenario, Fee-Only Pro A’s total cost to you would be $7,000 per year.

In comparison, Fee-Only Pro B quotes a percentage of AUM fee at a below-average 0.9% annual rate to manage your $1 million. After all, with a larger account to manage, economies of scale take over and you wind up with a lower percentage fee than average. With that, the math would work out like so:

$1,000,000 x 0.009 = $9,000

Sure, Fee-Only Pro B’s percentage fee is below average — but that $9,000 is clearly quite a bit more than the $7,000 figure Fee-Only Pro A quoted you. At the same time, Fee-Only Pro B may charge separately for creating your financial plan and providing other financial services, such as tax preparation. Fee-Only Pro B’s fee will go up and down with the value of your investment account, and that may or may not reflect the reality of your financial situation and the amount of work required — it’s simply a reflection of the value of a single piece of your financial picture at a given moment in time.

With cost considered, it’s still important to evaluate the single most important thing you should seek in working with any financial professional — value.

Evaluating value

How Does Financial Planning Fort Collins Charge New Clients?

For a transparent look at FPFoCo services, fees, and much more, see our How It Works page and check out our Form ADV Part 2 Brochure.

In our hypothetical example, you would’ve felt confident working with either professional as both had the same levels of education and experience and both offered the services you needed — albeit at different price points. But based on their available services and the fees they charge, how much value could each professional offer you?

Even if you’re not ready to interview prospective financial professionals yet, you can do a similar apples-to-apples comparison using one important piece of every advisor’s toolkit: Form ADV Part 2. In it, you’ll find how each financial professional charges clients, the scope of each pro’s services, and how each is paid. Armed with information, you can take your research to the next level when you’re ready, asking those same professionals a few questions, like what they provide for the price, including any “extras.”

The definition of value can be different for everyone, so it’s important for every investor to look at more than just cost. Finding an advisor you know, like, and can trust your investments — aka your future — to is key as is knowing what you’re getting in return for what you’re paying.

Ready to schedule your next meeting?

Simply head to the Meeting page where you can find and schedule a convenient time to discuss whatever is on your mind.

*This is a hypothetical financial planning scenario presented for illustrative purposes only. It should not be construed as an investment recommendation or solicitation. Please consult an advisor to discuss your individual situation prior to making any investment decision. The rates of return do not represent any actual investment and cannot be guaranteed. Any investment involves potential loss of principal.

Jason Speciner
jason@fpfoco.com

Jason Speciner is a CERTIFIED FINANCIAL PLANNER™ professional, an Enrolled Agent, and the founder of Financial Planning Fort Collins, a 100% employee-owned and fee-only firm. He is also a member of the National Association of Personal Financial Advisors (NAPFA) and XY Planning Network (XYPN). Since 2004, he has served clients of all ages and backgrounds with unique experience working with members of generations X and Y. To learn more, check out Jason's blogs and see the media he's been featured in.



MINIMUM ACCOUNT SIZE
The minimum initial investment for the Invest:FOCO platform is only $5,000 per account. This minimum can be met via transfer of an existing account or with new funds.
ANNUAL FEE
1.00% of assets under management ($100 per $10,000 managed). Debited from your account(s).
FINANCIAL PLANNING
Strategy:FOCO financial planning services are ongoing, and include unlimited phone, email, web and in-person meeting and consultation time. Pricing is based on the unique circumstances of each client situation. Generally, there is a one-time plan development fee ranging from $500 - $2,000 and a monthly fee of $150 - $500; cancel anytime. Clients utilizing investment management services with portfolios of $500,000 or more will typically receive financial planning services for no additional fee.
INVESTMENT MANAGEMENT
Assets Under Management (AUM) Annual fee as a % of AUM or flat-dollar
$0 - $249,999 (See Invest:FOCO)
$250,000 - $499,999 0.90%
$500,000 - $999,999 0.80%
$1,000,000 - $1,999,999 0.65%
$2,000,000 - $2,999,999 0.50%
$3,000,000 - $3,999,999 $15,000
$4,000,000 - $4,999,999 $20,000
$5,000,000 or more $25,000 + $2,000 per additional $1mm
MINIMUM ACCOUNT SIZE
There is a minimum initial investment of $100,000 per Strategy:FOCO client household. This minimum can be met via transfer of existing accounts or with new funds. A client household may generally include accounts for a head of household, a significant other, dependents, and any controlled organizations or entities.

Minimums do not apply to inStream proactive financial planning as a stand-alone service.
ANNUAL FEE
Assets Under Management Fee as a % of AUM
$100,000 - $249,999 1.00%
$250,000 - $499,999 0.90%
$500,000 - $999,999 0.80%
$1,000,000 - $1,999,999 0.65%
$2,000,000 or more 0.50%

inStream proactive financial planning as a stand-alone service: $1,000/year or $100/month
MINIMUM ACCOUNT SIZE
There is a minimum initial investment of $100,000 per Strategy:FOCO client household. This minimum can be met via transfer of existing accounts or with new funds. A client household may generally include accounts for a head of household, a significant other, dependents, and any controlled organizations or entities.

Minimums do not apply to inStream proactive financial planning as a stand-alone service.
ANNUAL FEE
Assets Under Management Fee as a % of AUM
$100,000 - $249,999 1.00%
$250,000 - $499,999 0.90%
$500,000 - $999,999 0.80%
$1,000,000 - $1,999,999 0.65%
$2,000,000 or more 0.50%

inStream proactive financial planning as a stand-alone service: $1,000/year or $100/month
MINIMUM ACCOUNT SIZE
The minimum initial investment for the Invest:FOCO platform is only $5,000 per account. This minimum can be met via transfer of an existing account or with new funds. Invest:FOCO is currently available for Individual, Joint, Traditional IRA, and Roth IRA registrations.
ANNUAL FEE
0.65% of assets under management ($65 per $10,000 managed)
MINIMUM ACCOUNT SIZE
The minimum initial investment for the Invest:FOCO platform is only $5,000 per account. This minimum can be met via transfer of an existing account or with new funds.
ANNUAL FEE
0.65% of assets under management ($65 per $10,000 managed)
TAX PREPARATION
Invest:FOCO clients are eligible for a 10% discount on income tax preparation services offered through Fort Collins Tax Service, LLC. This discount applies to the base cost for return preparation as well as Schedules B & D. More details can be found here.
MINIMUM RELATIONSHIP SIZE
There are no minimums when utilizing inStream proactive financial planning as a stand-alone service.

When investment management services are desired, there is a minimum initial investment of $125,000 per Strategy:FOCO client household. This minimum can be met via transfer of existing accounts or with new funds. A client household may generally include accounts for a head of household, a significant other, dependents, and any controlled organizations or entities. inStream proactive financial planning is then included at no additional cost.
ANNUAL FEE
inStream proactive financial planning as a stand-alone service: $1,250/year or $125/month

Assets Under Management Fee as a % of AUM
$125,000 - $249,999 1.00%
$250,000 - $499,999 0.90%
$500,000 - $999,999 0.80%
$1,000,000 - $1,999,999 0.65%
$2,000,000 or more 0.50%
TAX PREPARATION
Strategy:FOCO clients are eligible for a 50% or 100% discount on income tax preparation services offered through Fort Collins Tax Service, LLC. This discount applies to the base cost for return preparation as well as Schedules B & D. More details can be found here.
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Monthly Economic Update
Stay in the loop with our Monthly Economic Update. It's a great way to catch up on the things effecting your financial plan in an easy to read and relatable format.

We promise to only use your name and email address for sending our Monthly Economic Update. We will not sell, rent, lease, loan, or use your name or email address for any other purpose, internally or externally. You can easily unsubscribe at any time.
MINIMUM ACCOUNT SIZE
Minimums do not apply to always-on, real-time financial planning as a stand-alone service.

For investment management services there is a minimum initial investment of $125,000 per Strategy:FOCO client household. This minimum can be met via transfer of existing accounts or with new funds. Investment management fees are generally debited from the accounts to which they apply. Financial planning services are included for Strategy:FOCO investment management clients at no additional charge.
ANNUAL FEE
Always-on, real-time financial planning as a stand-alone service:  $125/month or $1,250/year

Assets Under Management Fee as a % of AUM
$125,000 - $249,999 1.00%
$250,000 - $499,999 0.90%
$500,000 - $999,999 0.80%
$1,000,000 - $1,999,999 0.65%
$2,000,000 or more 0.50%
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FINANCIAL PLANNING
Financial planning services are ongoing, and include unlimited phone, email, web and in-person meeting and consultation time. Pricing is based on the unique circumstances of each client situation. Generally, there is a one-time plan development fee ranging from $500 - $2,000 and a monthly fee of $150 - $500; cancel anytime. Clients utilizing investment management services with portfolios of $500,000 or more will typically receive financial planning services for no additional fee.
INVESTMENT MANAGEMENT
Assets Under Management (AUM) Annual fee as % of AUM or flat-dollar
$0 - $249,999 1.00%
$250,000 - $499,999 0.90%
$500,000 - $999,999 0.80%
$1,000,000 - $1,999,999 0.65%
$2,000,000 - $2,999,999 0.50%
$3,000,000 - $3,999,999 $15,000
$4,000,000 - $4,999,999 $20,000
$5,000,000 or more $25,000 + $2,000 per additional $1mm
ESTIMATE YOUR FEE
Your fee is determined by the complexity of your needs and situation. The primary proxy we use for complexity is your investable net worth, which is generally your total net worth, excluding your primary residence. Your investable net worth includes the value of cash, bonds, stocks, mutual funds, rental real estate, and other business or financial interests. This aligns with the holistic nature of our comprehensive services. You can use the chart below to estimate your fee based on your investable net worth. In some circumstances, your fee may be more than the minimums in the chart below.
Annual Fee Investable Net Worth (INW)
$4,000 (minimum for an individual) Up to $500,000
$6,000 (minimum for couples) Up to $1,000,000
$8,000 Up to $1,500,000
$10,000 Up to $2,000,000
$11,000 Up to $2,500,000
$12,000 Up to $3,000,000
+ $1,000 per additional $1,000,000 of INW
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ESTIMATE YOUR FEE
Your fee is determined by the complexity of your needs and situation. The primary proxy we use for complexity is your net worth, which is the value of what you own — including cash, bonds, stocks, mutual funds, real estate, and other business or financial interests — minus what you owe. Our transparent, flat-dollar pricing aligns with the holistic nature and value of our comprehensive services. You can use the chart below to estimate your fee based on your net worth. In some circumstances, your fee may be more than the minimums in the chart below.
Annualized Flat Fee Net Worth (NW)
$6,000 (our minimum fee) Up to $1,000,000
$8,000 Up to $1,500,000
$10,000 Up to $2,000,000
$12,000 Up to $3,000,000
+ $1,000 per additional $1,000,000 of NW
FEE SCHEDULE
Unless there is truly unique or extraordinary complexity associated with a client’s situation and financial circumstances, our fee will be based on the market value of the assets under management (AUM) for investment management services, subject to a minimum fee. The fee is blended and calculated using the following schedule. We do not require a minimum investment of any amount.
Assets Under Management Annual Fee
$0 - $1,000,000 $6,000
$1,000,000 - $3,000,000 0.50%
$3,000,000 - $5,000,000 0.25%
$5,000,000 and above 0.10%