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The Importance Of Knowing How Brokers Earn Their Money

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Brokers and financial advisors make money in a number of ways, including:

  • Salary and commissions paid by their firms
  • Hourly or flat-rate fees for their services
  • Third party commissions
  • Or a combination of these sources

Unfortunately, some financial professionals may try to pressure investors into new investments that generate a commission for them (the broker) even when those investments aren’t the best fit for the client. Other fraudsters may try to hide outrageous fees by burying the fee structure in the fine print, or just failing to mention it.

Fee-Only Investment Accounts

The financial industry has been moving toward a fee-only model in recent years. Fee-only accounts are managed by financial advisors that do not accept any fees or commissions based solely on their product sale. These accounts primarily charge a percentage of assets under management, but could also include other methods of charging clients, such as:

  • Flat retainer
  • Hourly rate
  • Charge specific to the task at hand

Fee-only advisors have fewer inherent conflicts of interest and they generally provide more comprehensive advice.

Fee-Based Brokers

Commission-based brokers often take offense at this distinction. Blurring the difference, they created the category “fee based,” which means they charge a fee in addition to collecting commissions. Study after study shows that even consumers seeking a strictly fee-only advisor find these terms confusing, and can be easily misled.

A fee-only account may not be a right path for everyone. If you’re going to trade only five to seven times per year, it’s probably more economical for you to pay commission, as opposed to paying somebody a percentage of your assets under management.

The Takeaway

The takeaway is that it’s important to know how your broker is getting paid in order to ensure that the fee structure is the best fit for you. You can keep yourself informed by asking your broker directly about fees and commissions, carefully reading through your brokerage agreement, and reviewing your account statements and other documents to monitor fees and commissions.

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