Question of the week: How is my adviser paid?

If you have an adviser you’re paying him or her in some way for the services they provide to you. You may not personally hand them cash or see the money come out of your account, but it’s happening nonetheless. Since that’s the case, how does your adviser get paid? There are a number of different ways and you really should know which method so that you understand how much you are paying for your investments.

Advisers are typically paid in at least one of the following ways…

  • Salary
  • Commission
  • Flat Fees
  • A combination of these

Advisers receive their pay from the firms they work for and may also receive pay from the companies whose investments they sell.

Salary is of course the most basic and easy to understand. An adviser paid by salary receives a specified amount from their firm which is likely dependent on their hours worked, their number of clients and the products they sell.  An investor is charged a service fee which may cover part of the adviser’s salary and is added on to the cost of the investment for services rendered.  The service fees that a firm charges for investments in securities are now required to be set out on statements that are sent to investors semi-annually. 

An adviser that is paid by commission receives money for buying and selling securities and other products for their client from the firm the adviser works for and may also receive compensation from investment funds they sell.  Here are a couple examples of commissions.

Front end commissions:

Certain investment products will pay a commission to your adviser when purchased. If an adviser makes a stock trade for you they will receive a percentage of the trade. For mutual funds, there are generally two types of commissions – front end and deferred sales charges (DSC).

A front end commission is a percentage of the transaction amount deducted from the amount invested up front. As an example, if you were to invest $1,000 in mutual funds and your front end fee was 1.5%, your adviser would get $15 as their commission.

A DSC is paid to the adviser by the mutual fund company. On the same $1,000 investment with a typical 5% DSC, the adviser would receive $50 from the mutual fund company at the time of purchase. This does not decrease the value of your investment, but if you withdraw money from the fund before a certain period of time (often 7 years), you will have to pay a DSC redemption fee. In addition, the adviser will also receive a trailing commission from the mutual fund company.

Trailing commissions:

Trailing commissions are also referred to as trailer fees and are built into the management expenses (management expense ratio or MER) of mutual funds. They are ongoing embedded commissions paid to an adviser by the mutual fund as long as you own the fund. They usually run from 0.25% to 1% annually.  For example, if your statement reflects a 4% rate of return on your $1,000 investment in a mutual fund and the MER was 1%, then your $1000 investment actually earned 5%. When purchasing mutual funds, always ask what your MER will be so you know how much of your potential investment is going to your adviser. 

Flat fees are exactly what they sound like. They are fees your adviser charges to do things such as purchase or sell stocks or mutual funds, or develop a financial plan for you. 

Whether you’re just starting out with a new adviser or have been with the same adviser for years, you should always know how they are getting paid and what that will mean for your investment returns.

Even after having this discussion with your adviser and learning what they will be paid, it’s still up to you to keep track of it. Fortunately, that became easier last year when CRM2 came in effect. Under new guidelines, advisers must provide their clients with a semi-annual report on charges and other compensation. This will provide you with a summary of the charges incurred in your account by your adviser and their firm. Be sure to examine this report when it arrives and if you have any questions about it be sure to take them to your adviser.

As trailing commissions are embedded in a mutual fund’s MER, such amounts will not appear on your statement so you should ask your adviser what additional fees you are paying.