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How Are Financial Advisors Compensated?

Paying for goods and services is something we are all generally pretty used to and familiar with, but when it comes to our industry, we find that many prospective clients often seem to have questions or don't feel like they fully understand how the financial products and services they purchase and pay for are paid. Knowing how financial professionals are compensated is something you should not feel uncomfortable asking about, and should fully understand about any investment you consider. 

Financial professionals are compensated in two different ways, fee-based compensation, and commission. The nature of which will be used depends on the product or service being purchased. Every investor should understand the compensation structure of the investment and professional they plan to use.

Fee-based compensation is pretty much just like what it sounds. The investor will pay the financial advisor a predetermined fee for a service. This could be either a fixed amount, or a percentage based fee. Fees can vary and range depending on the firm and nature of the client's needs. In order for an advisor to be able to work for a fee, the advisor must pass an investment advisor representative exam, such as the series 65.

When it comes to commission based compensation, the advisor is paid a commission by the firm to who they sell an investment product or security to an investor. A common example of a commission based product would be a financial professional selling an annuity to an investor. In this example, the commission is paid from the insurance company directly to the advisor, without the client having to pay the advisor directly.

Other important fees to note are mutual fund fees, mortality and expense (or M&E) fees, administrative fees, trading fees, and other fees that can be applicable to a client's investments and accounts. These other fees can vary in amount, and may or may not be applicable depending on the type of investment accounts that the investor selects.

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