©iStockphoto.com/Yuri Arcurs Image by: ©iStockphoto.com/Yuri Arcurs
Like every hard working Canadian, financial advisers need to get paid. How they receive their cut, though, can vary. In the past, it was often hard to pin down just what financial advisers were making off their clients and how adviser fees were calculated.
Thankfully, public pressure has made the fee collecting process more transparent, but it's still your responsibility to ask exactly how your advisor expects to get compensated.
Here are a few of the different ways financial advisers get paid and what you need to know about adviser fees.
â€¨The most common form of compensation is through commission fees. Financial advisers take a percentage of your assets. Depending on who you're investing with and what the company offers, you could end up paying between 1 per cent and 5 per cent on commission fees. There are two main types of commission fees for mutual fund advisers: Front-end load and back-end load.
Front-end load: This is the term for the upfront fee that gets deducted from your investment. If the adviser charges 3 per cent, they'll take that money first and invest the rest.
Back-end load: Mutual fund companies will often pay advisers themselves for getting clients to buy their product. There's no charge to the client directly, unless you remove your money before a prescribed date. Usually, you'll get charged a percentage of the withdrawal within six years of investing. The charge is to discourage investors from pulling out their money -- if you do, you're essentially paying back part of the commission.
This type of compensation has courted some controversy over the years. Some people think, that because the mutual fund company is paying the adviser, it affects the planner's impartiality.
Page 1 of 2 -- Some financial advisers apply a fee for service rule. Find out what that means for your wallet on page 2.
2. Fee for serviceâ€¨
Many financial planners are adopting a fee for service model. This means that a client gets charged a set price that depends on what the adviser does for them. This model allows the adviser to do more than just invest.
They may charge you $2,000 to come up with a comprehensive financial plan and $1000 for an estate plan.
Typically, when it comes to investing, commissions still apply, though some may charge a standard fee depending on how many assets you're investing.
â€¨Some bank advisers are paid a salary, just like most employees. There's likely a bonus attached -- often for bringing in new business or investing a certain amount of assets -- but not in every case.
There are pros and cons to all of these adviser fee structures, so figure out which one you like best and find an adviser that matches up.
More importantly, though, be sure to ask your adviser how they're compensated and make sure the adviser fees are clearly explained and obvious in your bank statement. That will make it easier to see how much money you're really making.
Page 2 of 2