Financial advisors are typically paid based on the commissions and fees they generate by selling products and services to clients. It is rare for an advisor to have a traditional salary.
As a result, new financial advisors often struggle to understand their compensation and how it evolves. This confusion can lead to short sighted decision making that negatively impacts the advisor’s long term bottom line.
Consolidated Planning develops financial advisors with our $250,000 in Five Years practice building playbook. The foundation of this playbook is a deep understanding of financial advisor compensation across a broad product mix. We share this knowledge with our advisors to help them maximize their income now and in the future.
Some financial advisors are product first and lead with either insurance or investments. Others are planning first, and products follow strategy. Consolidated Planning advisors pride themselves on being planning first.
This article will break down how you are compensated for the products and services you sell as a financial advisor. Additionally, we’ll give you an example of the potential first year income for a financial advisor with Consolidated Planning. With this information, you’ll be able to make an educated decision on what is best for your future, as a financial advisor.
How Are Financial Advisors Compensated On Planning Fees?
Financial advisors charge clients fees for planning work outside the scope of just investments or insurance. These fees are typically for a one time engagement that addresses a particular issue, or they can be an ongoing subscription arrangement similar to a retainer.
Advisors have flexibility in the fees they charge clients but most choose either a flat fee or a percentage of income or assets. A typical planning fee for an individual or family would range between $500 to $5,000 per year based on complexity.
Business planning fees can start at $2,000 and potentially exceed $25,000. The range for business planning fees is considerably wider than for an individual due to the potential increase in complexity and need to involve specialists from multiple disciplines.
How Are Financial Advisors Compensated On Life Insurance?
Life insurance provides a solid financial foundation for clients and creates a similar foundation for your income as a financial advisor. When a life insurance policy is sold, the advisor selling the policy earns a commission based on the policy’s premium.
The commission varies from company to company, but typical first year commissions for a whole life policy are between 50-80% of the policy’s premium. If you sold a policy with a $5,000 annual premium, you could expect to earn between $2,500 to $4,000 in commissions during the first policy year.
Life insurance policies also pay renewals as the policy remains in effect after the first contract year. Renewals are a percentage of the policy’s premium. Renewals are typically between 0-18% of the policy’s premium and vary by company. Continuing with our example of the $5,000 annual premium, you could expect to earn between $0 to $900 in renewals as long as the policy continues to pay premiums.
These commissions often make up the bulk of an advisor’s income during their first year in business due to their higher upfront compensation. Over time, the composition of an advisor’s income changes due to the compounding effect of income from other sources like investments and planning fees, which leads to life insurance creating a minority of the advisor’s income.
How Are Financial Advisors Compensated On Disability Insurance?
Disability insurance also pays commissions based on policy premiums similar to life insurance. First year commissions vary from company to company but are typically between 50-85% of the policy premium. If you recommend a disability policy with a $2,000 annual premium, you could expect to earn between $1000 and $1,700 during the first policy year.
Disability insurance also pays renewals after the first policy year. Renewals are a percentage of the policy’s premium. Renewals vary from company to company but are typically between 2-15% of the policy’s premium. Continuing with our example of the $2,000 annual premium, you could expect to earn between $40 to $300 in renewals each year the policy remains in effect.
These policies are commonly sold with riders, allowing insurance coverage to be increased over time if the policy owner chooses. This can result in additional commissions.
How are Financial Advisors Compensated On Annuities?
Financial advisors recommend annuities to clients for retirement income. They earn commissions based on the money paid into the annuity contract—different types of annuities payout different commission rates. Some advisors choose to recommend fee based annuities that charge an annual management fee rather than an upfront commission.
A fixed annuity may pay a one-time 6% commission at the time of purchase. In contrast, a deferred income annuity may pay a 3% upfront commission and a trailing commission of 1% per year beginning in the second year.
In general, you can expect annuity commissions to fall within these ranges:
● Fixed Index Annuity – 4.5 to 6% commission
● Single Premium Immediate Annuity – 1 to 3% commission
● Deferred Income Annuity – 2 to 4% commission
● Variable Annuity – 3 to 4.5% commission
● Fee Based Annuity – 1 to 2% annual fee
The commissions you earn from selling annuities will likely be paid to you as gross dealer concession (GDC) through your broker dealer. Your broker dealer will then pay you a percentage of the GDC as income based on your payout rate. Payout rates can range from 28% to 98% and are impacted by variables like firm support levels and advisor production.
Let’s take a look at an example. Suppose you sold a $100,000 Deferred Income Annuity with a 2% upfront commission and a 1% trail. This would generate $2,000 of GDC in year one. Now, suppose you have a 50% payout from your broker dealer. You would earn $1,000 of first year income for selling that annuity. In year two, the value of the annuity may have increased to $105,000. You would receive $1,050 of GDC and $525 of income in year two. The trailing commissions continue as long as the annuity contract is in force.
How Are Financial Advisors Compensated On Investments?
There are two primary ways financial advisors are compensated on investments like stocks, bonds, mutual funds, and ETFs: commissions and fees.
The increasing popularity of low cost or free online stock trading sites has caused a significant decline in full service commission based investing. It would be a fool’s errand for a new advisor to attempt to make a living by selling stocks for a commission.
However, there are times when you find it in the client’s best interest to purchase a commission based mutual fund. In these instances, you would earn between 1 to 5% of the purchase price in upfront commission and 0.25 to 1% in annual trailing commissions.
These commissions are paid to your broker dealer and you receive a percentage based on your payout rate.
Most financial advisors charge an annual investment management fee based on assets under management (AUM). This fee typically ranges from 0.75 to 2.0% and covers the cost of the investment advisor and trading costs. This compensation model is preferred because it aligns the client and advisor’s interest in growing the account value while eliminating concerns of rapidly trading (or churning) investments to generate excessive commissions.
Investment fees are paid monthly or quarterly and are ongoing for as long as the account remains open.
Imagine that you just opened a managed investment account with $300,000 and a 1% annual fee. You would earn $3,000 of GDC the first year the account was open. Suppose you have a 50% payout rate. You would earn $1,500 of income in year one for opening that account.
As the account’s value grows over time, so do your fee and income. After five years at an 8% growth rate, the account value would be nearly $450,000, and your annual income from the account would be 50% greater than the first year you managed the account. As you can see, the power of investment compounding also works to compound your income from investments.
Build A Profitable Financial Planning Practice
By now you know that financial advisors have multiple income streams feeding into their bottom line. Some products, like life and disability insurance, provide a high initial payout. On the other hand, investment and planning fees are often smaller initially and compound over time.
By offering a comprehensive mix of products and services to your clients, you are able to build a more profitable and sustainable financial planning practice.
At Consolidated Planning, our average first year advisors earn about $72,000 following our practice building playbook. To learn more about how this playbook could help your practice grow, reach out to our team.
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