From our advisors
Ever wondered how that person helping you with your money actually makes a living? It’s a fair question, and one that often gets a bit murky. The short answer is, financial advisors get paid in a few main ways, and understanding these is key to knowing what you’re actually paying for. We’re talking about fees based on how much money they manage for you, commissions embedded in specific products, and sometimes a mix of both. There are also newer models like flat fees or subscriptions that are becoming more common. Let’s break it down so it’s less of a mystery.
When you sit down with a financial advisor, you’re essentially entering into a professional relationship. Like any service, there’s a cost involved. This cost isn’t usually a single, simple number. Instead, it’s a combination of different structures that advisors use to get paid for their expertise, time, and the management of your investments. Think of it like hiring a contractor – they might charge you by the hour, by the project, or a combination of both depending on the scope of work. Financial advisors operate on similar principles, but with nuances specific to the financial world.
The most common way advisors have been paid, and still are, is through a percentage of the assets they manage for you. This is known as Assets Under Management, or AUM. But that’s just the tip of the iceberg. In Canada, there are also commissions and trailing commissions embedded in many mutual funds, plus flat fees, hourly rates, and even subscription models. It’s not always straightforward, and the terms can sound complicated. Knowing these different structures helps you have a more informed conversation with your advisor and understand the total cost of your financial guidance.
This is probably the one you’ve heard about the most. AUM fees are straightforward in concept: the advisor takes a small percentage of the total value of the investments they are managing on your behalf. This means as your portfolio grows, the advisor’s fee also grows, and if it shrinks, so does their fee. In Canada, this is the model behind most “fee-based” accounts.
Essentially, if an advisor charges you 1% of AUM, and you have $100,000 invested with them, they would pay themselves $1,000 per year for managing it. This fee is typically taken directly from your investment account, often quarterly. So, if you have $100,000, they might deduct $250 every three months. It’s an ongoing charge for the service of managing your money, providing advice, and making investment decisions.
While the idea of 1% is common, the actual rates can vary. For many advisors, the fee commonly sits around 1%. Larger portfolios often negotiate a lower percentage, since even a small rate on a big sum adds up quickly, while smaller portfolios or more specialized, hands-on service can carry a higher rate.
Industry analyses consistently place typical advisory fees near that 1% mark, which makes it a solid benchmark to keep in mind. It’s important to remember that this percentage often covers a broad range of services, from basic portfolio management to more comprehensive financial planning. In fee-based accounts, this advisory fee is usually paired with lower-cost F-series funds, which we’ll get to shortly.
The appeal of AUM fees for clients is that the advisor’s compensation is directly tied to the growth of the client’s portfolio. This can create a sense of alignment – the advisor is incentivized to grow your money, as that’s how they earn more. However, a potential downside is that the fee is charged regardless of market performance. If the market takes a downturn and your portfolio loses value, you’re still paying the same percentage on a smaller amount, which can feel like you’re paying for something that’s shrinking.
Commissions are a different way for advisors to earn money, and in Canada they’re often built into the financial products themselves. Instead of a recurring fee based on your total investments, the advisor (or their firm) earns a payment when a product is sold, and often an ongoing “trailing commission” for as long as you hold it. This model is more akin to a sales-based compensation structure.
Commissions are commonly found when an advisor is recommending and selling products like commission-based mutual funds, insurance policies, segregated funds, or annuities. When you purchase one of these products through an advisor, they might receive a percentage of the sale as their commission. This is particularly prevalent in more traditional, transaction-oriented settings.
With mutual funds, the classic structure is the sales charge, or “load.” A front-end sales charge is a percentage deducted when you buy — so if the charge were, say, 2% on a $10,000 purchase, $200 would come off the top. These charges are often negotiable, and many funds today are sold with no upfront charge at all. It’s worth knowing that deferred sales charges (the old “DSC” funds that penalized you for selling early) are no longer permitted on new mutual fund purchases in Canada. The bigger ongoing piece is the trailing commission: a portion of the fund’s management expense ratio that the fund company pays to your advisor’s firm every year you hold the fund, typically to compensate for advice and service. Because it’s embedded in the fund’s costs, it’s not a fee you write a separate cheque for — which is exactly why many investors don’t realize they’re paying it.
Commission arrangements vary quite a bit depending on the product and the company selling it. Trailing commissions on mutual funds commonly run up to around 1% per year for equity funds, with lower rates on bond and money market funds. For insurance-based products like segregated funds and certain annuities, the commission structure can be richer, reflecting the complexity and long-term nature of the product. It’s crucial to understand that these embedded costs reduce your net return year after year, even though you never see a bill.
One of the main criticisms of commission-based compensation is the potential for conflicts of interest. Because an advisor earns money when they sell a product, there’s a theoretical incentive to recommend products that pay higher commissions, even if they aren’t the absolute best fit for the client’s needs. This is why Canadian regulators emphasize transparency, suitability, and putting the client’s interest first — including rules requiring firms to identify and address material conflicts of interest — to help ensure clients are being served properly.
This is where things can get a little confusing, and it’s a really important distinction to make when you’re choosing an advisor. The terms “fee-based” and “fee-only” sound similar, but they represent very different compensation structures. Knowing the difference can save you from unexpected costs and potential conflicts.
In Canada, a “fee-based” account means you pay the advisor a transparent, direct fee — usually a percentage of assets — instead of the advisor being compensated through commissions embedded in the products. To avoid doubling up, fee-based accounts typically hold F-class (F-series) funds, which are versions of mutual funds with the trailing commission stripped out of the management expense ratio. The term can also describe advisors who operate on a hybrid basis: charging direct fees for some services while still earning commissions on others, such as insurance products. That’s why it always pays to ask exactly how the arrangement works.
In contrast, a “fee-only” (sometimes called “advice-only”) advisor or planner is compensated solely by their clients. They do not accept any commissions, referral fees, or other payments from third parties for recommending or selling financial products. Their income comes exclusively from the fees you pay them directly for their advice and services — often as a flat fee or hourly rate. This model is often preferred by clients who want to minimize the potential for conflicts of interest.
The reason this difference is so critical is its impact on the advisor’s incentives. A fee-only advisor is generally seen as having fewer conflicts of interest because their earnings aren’t tied to selling specific products. Their advice should, in theory, be based purely on what’s best for your financial situation. An advisor who can also earn commissions — while still bound by Canadian know-your-client, suitability, and conflict-of-interest obligations — has at least the potential to be influenced by the compensation attached to different products.
As the financial advisory landscape evolves, more Canadian advisors are moving away from purely AUM or commission-based models, or offering them as part of a broader service package. These alternative structures aim to provide more predictability in costs for clients and can be particularly appealing for specific needs.
A flat fee model means you pay a fixed amount for a specific service or a defined period. This can be a one-time fee for a comprehensive financial plan, or an annual flat fee for ongoing advisory services.
The hourly rate model is very straightforward. You pay the advisor for the time they spend working on your behalf. This can be great for clients who only need occasional advice or have specific questions they want answered.
Retainer and subscription models offer ongoing access to an advisor for a recurring fee. This provides a sense of continuous support and accessibility.
These models can offer more cost predictability for clients. With AUM fees, your costs fluctuate with the market. With flat fees, hourly rates, or retainers, you have a clearer idea of what you’ll pay, making budgeting easier. They also allow for more flexible engagement with an advisor, catering to a wider range of client needs and preferences.
Beyond the fees you pay directly to your financial advisor, it’s crucial to be aware of other costs that can be hidden within your investment accounts. These are often referred to as “embedded costs” because they are part of the investment product itself or the services provided by the financial institution holding your assets.
When you invest in mutual funds or ETFs, these funds have their own operating costs, expressed as the management expense ratio (MER) — an annual percentage of the fund’s assets that covers the management fee, operating expenses, taxes, and, in commission-based fund series, the trailing commission. Even if your advisor isn’t charging a high direct fee, a high MER on the underlying investments can significantly eat into your returns over time. For example, an MER of 0.5% on a fund means that for every $10,000 you have invested in that fund, about $50 is paid out annually in costs — and MERs on actively managed Canadian equity funds are often considerably higher than that. The Fund Facts document you receive when buying a mutual fund lists the MER and sales charges in plain language, so read it.
The institution holding your account may also charge administration fees — for example, annual administration fees on registered accounts like RRSPs, transfer-out fees when you move an account to another institution, or charges for processing certain transactions and statements. These fees are often relatively small, but they are another cost to consider.
In some cases, you might encounter “wrap” programs or managed-account fees. This is a fee that bundles together the costs of advisory services, trading, and administration into a single annual charge, often expressed as a percentage of AUM. While they aim for simplicity, it’s important to understand what services are actually included and whether the bundled fee is competitive compared to paying for each service separately.
It’s important to think about the “total cost of ownership” when investing. This includes not only the advisor’s fees but also the MERs of your investments, any account administration fees, and other charges. A financial advisor who is transparent about all these costs can help you make informed decisions about how to structure your portfolio to minimize overall expenses while still receiving the advice you need.
Now that we’ve broken down the different ways financial advisors get paid, the next logical step is knowing how to approach this conversation with them. It’s not about being accusatory; it’s about being informed and ensuring you’re comfortable with the arrangement. Being proactive will help you find the right advisor and the right compensation structure for your needs. And remember: under Canada’s CRM2 disclosure rules, your firm must send you an annual report showing, in dollars, the charges you paid and the compensation the firm received on your account. Actually read that report — it’s the clearest picture you’ll get of what your advice really costs.
The most important question you can ask is, “How are you compensated?” Don’t be afraid to ask for specifics. Do they charge a percentage of assets? Do they receive trailing commissions on the funds they recommend? Are they fee-only? Do they offer flat fees or hourly rates? A good advisor will be happy to explain their compensation clearly and without hesitation. Understanding their primary compensation model is the first step to understanding potential biases.
Following up on their compensation, ask directly about any potential conflicts of interest. You might ask, “Are there any products you recommend that would pay you more than others?” or “How do you ensure your recommendations are always in my best interest, even if they don’t involve a commission?” A transparent advisor will have a ready answer, often explaining their regulatory obligations, how their firm addresses conflicts of interest, and their professional code of ethics.
Beyond the advisor’s direct fee, ask them to outline all the costs associated with your investments. This includes their advisory fees, but also what you can expect to pay in MERs for any recommended funds, any trading costs, account administration fees, or other charges. Requesting a clear, itemized list or a summary of all anticipated costs can be very helpful. This goes back to that “total cost of ownership” concept we discussed.
Don’t be afraid to speak with multiple advisors and compare their compensation structures, fees, and services. What might seem like a slightly higher advisory fee for one advisor could be offset by lower MERs on their recommended investments, or a more comprehensive suite of services. Conversely, a seemingly lower fee might hide higher underlying costs or a less personalized service. You can also verify an advisor’s registration through your provincial securities regulator — in this province, the Alberta Securities Commission — or CIRO, and confirm CFP certification through FP Canada. Use the information you’ve gathered to make an informed decision that best suits your financial goals and risk tolerance. Understanding how your advisor is paid is a fundamental part of a successful financial partnership.
Financial advisors can be paid through fees, commissions, or a combination of both. Fees can be charged as a percentage of assets under management, hourly rates, or flat fees. Commissions are typically earned through the sale of financial products such as mutual funds, insurance, segregated funds, or annuities, and can include ongoing trailing commissions embedded in a fund’s MER.
Management costs refer to the expenses associated with managing an investment portfolio, such as fund MERs, trading fees, and administrative charges. These costs are typically deducted from the client’s investment returns, and in commission-based fund series a portion (the trailing commission) flows to the advisor’s firm.
Canadian advisors must provide relationship disclosure information when you open an account, and under the CRM2 rules your firm must send you an annual report on charges and other compensation showing, in dollars, what you paid and what the firm received. Fund Facts documents also disclose the sales charges and MER of any mutual fund before you buy it.
Financial advisors who earn commissions may have a conflict of interest when recommending certain financial products, as they may be incentivized to sell products that offer higher commissions rather than those that are in the best interest of the client. Advisors who charge fees based on assets under management may have a conflict of interest if they are motivated to increase the client’s assets in order to earn higher fees.
Clients can evaluate the cost of working with a financial advisor by reviewing their annual CRM2 report on charges and compensation, reading the Fund Facts for any recommended funds, comparing fees and commissions with other advisors, and understanding the impact of MERs and other management costs on their investment returns. It’s important for clients to have a clear understanding of how their advisor is compensated and how it may influence the advice they receive.
This article is provided for general information purposes only and does not constitute personal financial, tax, legal, insurance, or investment advice. Programs, tax rules, and regulations referenced are subject to change and may not apply to your circumstances. Please consult a qualified professional advisor before making decisions about your financial affairs. Lavoro Financial Group Ltd. is based in Edmonton, Alberta.
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