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Understanding Financial Advisor Compensation Models

What’s in a name?

You’ll see that both financial advisor and financial planner are used here and in various articles across the web. Many people use the terms interchangeably. We have chosen to use financial planner to describe ourselves because we feel it best reflects the role and scope of services provided by the Davis Financial Planning team. We help our clients plan for the lives they want to live now and in the future. Our role is part confidante, part strategist, and part guide.

Davis Financial Planning is a fee-only firm. Our clients know up front what their fee will be for our services for the entire year for investments, tax planning, and financial planning. No surprises, no hidden charges. We want our clients to reach out to us as they have life changes, opportunities, or questions without worrying about incurring additional cost to get our input and support.

The Three Compensation Models for Financial Planners/Advisors

Fee-only Financial Planners

Fee-only means that the only income the firm earns is from what clients pay for services.  There are no commissions on trades or insurance policies and no referral fees for recommending certain products or services. Some fee-only firms charge a flat fee, some charge by the hour for their time, and others charge a percentage of the investments they manage.

Fee-based Financial Advisors

While only one word different than above, this model is something of a hybrid between the others. A direct fee is charged for certain services and the advisor is paid in other ways. Often, the advisor charges a percentage on the assets they manage in addition to fees and receives commissions on products they recommend and sell such as insurance policies, annuities or managed or wrap accounts.

Commission-based Financial Advisors

These financial advisors are paid when they sell something directly to their client such as insurance, annuities, or new investment accounts. Additional sources of commissions also include when mutual funds are bought or sold (called loads), surrender fees for closing an account, and fees charged when a distribution is made from an account.  

Looking for other resources as you learn about the financial planning industry?

The National Association of Personal Financial Advisors (NAPFA) has developed a Financial Advisor Comparison Tool to help you find the right financial guide for you.

We have developed a helpful Glossary of Financial Planning Terms for you as well.

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