So you want to become a financial advisor. That’s great! Do you know what type of financial advisor you want to be?
Do you know what types of financial advisors there are?
Believe it or not, deciding what type of financial advisor to be is one of the most important decisions you’ll make when you’re first starting out. While there are no right or wrong answers, the implications of your decision will impact your company, the types of clients you acquire, and your bottom line.
In short, think carefully before you decide.
There Are Three Types of Financial Advisors
Let’s start with the basics. There are three types financial advisors:
Fee-Only Financial Advisors
Fee-Based Financial Advisors
Commission-Based Financial Advisors
So what’s the difference?
Fee-Only Financial Advisors charge their clients a fee for financial planning and/or investment advice. That fee can be charged hourly, monthly, quarterly, or per project. The services and fees can be packaged any way you like. The one thing a fee-only financial advisor can’t do is earn a commission for the sale of the products they recommend.
Fee-Based Financial Advisors charge their clients a fee, but they can also earn a commission on the sale of products they recommend. Again, the services and fees can be packaged in a number of ways. The key thing to note here is that a fee-based financial advisor may charge a fee, but may also earn a commission.
Commission-Based Financial Advisors don’t charge a fee for their services, but instead they earn a commission off the sale and usage of products they recommend.
How to Decide What Type of Financial Advisor You Should Be
So which type of financial advisor should you be?
While this is a business decision, it’s also a philosophical decision. How do you feel about fees vs. commission vs. a combination of both? Do you see value in doing things one way or the other?
Your business has the best shot at success if you build it from the heart. It has to come from what you believe in, what you would pay for. Anything less will be inauthentic and therefore difficult for the consumer to trust or buy into. Consumers can sniff out an inauthentic business a lot better than most people realize.
If you’re not sure which type of business aligns with your values, then take a look at the consequences of each type to determine what makes sense for you:
If you want to charge commission, then it will be necessary to recommend a line of products you can earn commission off of. That means less freedom for you when advising your clients, unless you already know of a suite of products you’d always recommend no matter what.
If you want to charge a fee and not earn commission, you’ll have to understand that potential clients may have an issue with paying a fee. Since there are services that appear to be free (commission-based), the client may not realize that you’re giving them the benefit of financially-unbiased advice in exchange for the fee.
If you want to do a combination of both and become a fee-based planner, then you could run into both of these scenarios.
On the flip side…
If you’re a commission-based financial advisor, you can earn quite a lot of money through the sale and usage of the products you recommend.
If you’re a fee-only financial advisor, you get the freedom to recommend any product you believe will do best by your client – and to show your client that you’re always keeping their best interest in mind. It may be more difficult to earn a lot of money this way (since you’re getting paid for your time, which is inherently limited), but it enables you total freedom in how you run your business.
Listen to Your Gut
No matter what you decide, it’s imperative that you listen to your gut. While you could always change your business model, a rebrand can be costly and time-consuming. It takes a lot of work to build a business, so why not set yourself up for success right away by doing it right the first time?
Fee-only, fee-based, commission-based, if you build the type of financial planning business that you believe in, then your future clients will better be able to trust you and follow your advice. Remember, this is a relationship business, not a transactional one. When you work to build that client base, keep the big picture in mind. If they trust you and their finances improve as a result of your services, then you’ll have a client (and a referral source) for life.
Image Credit: Ales Krivec