What is a Commissioned Financial Advisor?
This is a very good question, and one that I think is confusing to many people. What is a commissioned financial advisor? In this article we are going to answer this question. Once you're finished reading this article you will know all the details.
Back in the '80s and '90s, we had what we called stock brokers at places like Merrill Lynch or Smith Barney. These brokers would call up their clients and recommended individual stocks. I was working for one of these types of firms in the late '90s. I sat next to one of the brokers and I'd hear him call up his clients. I remember one day he said something like this when his client asked him how he was doing: "Well, I woke up this morning and I brushed my teeth with Colgate toothpaste and then I shaved with my Gillette razor. And then on the way to work I grabbed my self a Starbucks coffee. These are the stocks that you want to own." What he was doing was basically just calling clients and trying to sell certain stocks because he was going to make a 2% to 4% commission on the purchase of them. Of course, now you can buy stocks for less than $5 at the major discount brokerage houses like Fidelity and Schwab, and we don't really have stock brokers really any more. So that still hasn't answered our question, what is a commissioned financial advisor, but it's the background that led to commissioned financial advisors as we know them today.
A commissioned financial advisor is any financial advisor that receives compensation, or commission in this case, directly from the company that distributes a financial product when they recommend or sell that particular product.
So let's say for example that I sold a certain mutual fund, and the mutual fund company paid me a 3% commission. That would make me a commissioned financial advisor. Let's say that I sold a client a fixed index annuity, and the insurance company paid me a 6% commission. That would also make me a commissioned financial advisor. The same is true for any type of financial product, whether it's a mutual fund, annuity, life insurance, long-term care insurance, and any other financial product out there. All it comes down to is that a commissioned financial advisor is compensated through the sale of financial products. They are not compensated by their clients, but rather the companies that they are selling the financial products for.
Many commissioned financial advisors are also running programs that are fee-based. So they may be managing your money for a fee, as well as selling you some insurance products and making a commission on those. And these are called fee-based financial advisors.
A fee-based financial advisor is also a commission-based financial advisor or a commissioned financial advisor. Here's why: part of their compensation is commission that they receive from the recommendation of financial products, and in this particular example, insurance products. And part of the commission is a fee paid directly by their clients for the money that they might be managing for them. This is their securities, stocks and bonds and mutual funds and ETFs. As you look at a commissioned financial advisor, there's a significant difference from a fee-only financial advisor, which we have written other articles about, and you can certainly click on this link to learn more about fee-only financial advisors, which is what we are here at Third Act Retirement Planning.
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You are invited to set up a short 20 minute call with me to discuss any questions you have about a commission based financial advisor: https://calendly.com/thomascloud/retirement-ready-success-call. For example you may wonder, if you are working with a financial advisor is he or she commission based or fee based? There is no cost or obligation.
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