“You have to look back on the history of how our industry got started,” said Scott Frank, CFA, CFP, and founder of Stone Steps Financial in Encinitas, Calif. “Everyone was a broker and sold stuff to people. In the ‘90s, when mutual funds got bigger, brokers would get commissions from that. Then investment managers charged 1 percent to manage money.”
These days, it's more varied. Here’s a breakdown of how broker-dealers charge their clients, depending on the kinds of services they offer:
Commission: The broker or financial advisor receives payment when they sell you a product or service offered by the company they work for. This obviously motivates them to steer you toward those products over similar ones offered by other companies.
Percent of Assets Under Management: Investment managers charge a flat percentage of the money you have invested with them. As your assets grow, the money they earn from you grows. Many investment managers choose to only work with clients with a very high net worth, because they won’t earn much by managing smaller portfolios.
Fee-Based: In this hybrid approach, you’re charged a flat fee for financial planning services, plus a percent of assets under management.