What Are the Different Ways Financial Advisors Make Money?

Jason Watt breaks down one of our most commonly asked questions about the business side of financial advice — what are the different ways financial advisors make money?

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 Now this next question is going to become a clip for sure. It’s one of the questions we are most often asked, and I think you’re the perfect guy to walk our audience through. What are the different revenue models, financial planning models for the firms, for the individuals you see out there?

I think the right way to think about this is on a grid. There’s sort of, we imagine an X and y axis, and I know every compelling answer has an X and Y axis in it, Dave.

But we can think about the licensing that somebody carries. So are you licensed to sell securities? Are you licensed to sell insurance? Are you certified as a financial planner? So what’s the licensing that person has? And then we can draw on our other axis. How does that person get compensated?

And the compensation models, there’s a lot out here. Actually, as I was working through this, I knew there was a lot. So you can do straight commission based, the history of this industry is largely just straight commission based, but a lot of people have moved away from that. You’ve had a couple advice only planners on the podcast.

So you could be an advice only planner and you could charge hourly or you could charge for a project, or you could do a retainer basis or a subscription basis. So many ways to do advice only. We see lots of folks, and you’ve had a few of these on where they’re charging fees for assets under management or assets under administration.

We can have referral models here. Lots of advice only planners or I’m gonna maybe advice based planners. I’m not sure what the right framing is here. We’ll also do referral arrangements with a portfolio management shop, for example. And there are other referral arrangements, some kind of, I don’t know, some stuff that I think, you know, I’m not necessarily a huge fan of on the exempt market side with referral arrangements.

So I think that the two questions to ask if you’re trying to figure out what business model somebody fits in are, what licenses and certifications do you carry? And then how do you get compensated for doing that work?