Retail financial advisors are generally compensated through fees, commissions, or a combination of fees and commissions.
Commissions are paid when a transaction occurs. In other words, a financial advisor receives a commission when a customer buys a product. The commission is paid by the company that produces or “manufactures” the product—for example and insurance company or mutual fund.
Fees can come in many different forms. They may be hourly, annual, based upon assets under management, or upon completion of a specific deliverable such as a financial plan. For example, a fee-based financial planner may develop a financial plan on an hourly basis and receive an additional 1 percent of the client’s assets under management (“AUM”). So, $200,000 invested through the advisor would result in the client paying a $2,000 fee per year based upon AUM.
Annuity fees are discussed in more detail in the chapter titled “Annuity Details,” but a very roughly, annuity fees range from 50 basis points (a half of 1 percent) to 3.5 percent. These fees are generally applied to the premiums or money flowing into the annuity. Note that this cost estimate does not include any surrender charges or front-end loads (which are increasingly uncommon).
While annuity sales compensation is largely commission-based, there are many instances in which fee-based advisors discuss, recommend and sell annuities. As discussed in detail elsewhere in this buying guide, some fee-only financial advisors may in fact refer you to another financial advisor in order to complete an annuity purchase transaction.
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