The financial services industry is often perceived as a world of high stakes, significant rewards, and substantial compensation packages. However, the reality of how compensation works in this sector can be multifaceted. When you really boil it down, there are only two paths of compensation, or a combination of the two, in our industry.
The first path is a base salary.
In the financial services industry, base salaries vary widely depending on the role, the experience you bring to the table, and the size and location of the firm. Financial advisors who are just starting to build their practice typically start with a competitive base salary as they begin learning the financial planning process and onboarding their own clients. This base salary model can be a great option for young financial advisors beginning their careers, but compensation will be capped or limited to the salary provided by the company. Generally, you would expect to see this option with large companies where entry-level positions are more of a support role.
The second path is full variable or commission-based compensation.
In this model, financial advisors earn commissions for the services, advice, and products they offer clients. Quite often, financial advisors can earn bonuses in this model as they grow their clientele and practice. This path offers virtually unlimited earnings potential and allows for flexibility in the advisor’s income stream. The compensation from this model can be derived from product sales, fee-based financial planning advice, or an asset advisory fee. With this model, the risk is solely on the financial advisor for their income, but the upside can be substantially more than the salary-only path
The third option is a combination of the salary & commission-based compensation model.
What you typically encounter with this model is one of two things: 1.) A modest salary with the opportunity to earn bonuses as certain metrics and milestones are achieved, or 2.) A modest salary with the opportunity to earn a smaller commission rate on the advice and services offered to clients. Typically, this option is only available for the first two to three years as new financial advisors study for their industry exams, learn the financial planning process, and establish their practices. Afterward, they normally transition off the salary to a full variable compensation model.
No matter which compensation structure a firm uses, they are all subject to regulatory oversight to ensure fairness and transparency. Regulatory bodies, such as the Securities and Exchange Commission (SEC) in the United States, impose guidelines on compensation practices to prevent excessive risk-taking and ensure that firms operate in the best interests of their clients and stakeholders.
The bottom line is that there are only so many ways to split a dollar. That dollar can be guaranteed in the form of a salary, in which the employer is setting the wage and earnings potential of the financial advisor; variable compensation, in which the financial advisor has the risk and all the reward of their efforts; or a combination of both, where the advisor receives a modest guarantee with smaller variable compensation potential. There is no right or wrong model here, only what is best for the individual financial advisor’s specific situation.
