Broker-Dealers and Financial Advisors: Costs and Payouts

Whether you are a newly minted financial advisor looking for a firm to join, or you're ready to leave your current firm and are searching for a better payout, an essential part of deciding which broker-dealer investment firm to join is understanding their compensation structure.

First, let’s look at where the fees come from. The firm may charge the client a commission on the sale of mutual funds and other financial products. The firm might levy a client management fee based on a percentage of assets under management (AUM). Or the firm might do both. The gross fee charged to the client is then divided between the firm and the advisor. The firm’s portion of the fee goes to cover the overhead of the firm, including Securities Investor Protection Corp. (SIPC) fees, the company's technology platform, office equipment and space, and any other costs of running the business.

However, not every firm pays out the same percentage to its financial advisors.

Advisors who manage their clients’ assets themselves often pay 10-25 basis points on client assets for billing, statements and performance reporting. More broker-dealers are opting to do these functions themselves rather than through a clearing firm. As such, they'll usually charge between $12.50-$40.00 per account annually rather than basis points on assets.

Compared to basis points charged on assets, this new method usually represents significant savings. It allows advisors to net more for themselves or their clients. Another bonus on this structure is the use of Orion for the administration, which is known for its high accuracy in reporting.

At larger broker-dealers, you will often find a 10 to 25 basis point markup on management fees for a third-party money manager. Advisors are often not aware of this markup, and broker-dealers rarely wish to volunteer the information. However, it's important for an advisor to call ask their broker-dealer what the fees are.

It's more important than ever for broker-dealers to want mutual fund and variable-annuity assets to be held in brokerage accounts.

Some broker-dealers have tried to reduce the costs of holding assets in a brokerage account by not charging fees for systematic withdrawals/deposits, dollar-cost averaging or ticket charges on most mutual funds.

Inactive account fee and IRA custodial fees are still common costs that can be incurred in brokerage accounts. It's important for financial advisors to seek out a broker-dealer that isn’t twisting advisors’ arms to put all their assets in brokerage accounts.

Most broker-dealers require advisors to purchase their errors and omissions insurance through the broker-dealer’s group plan. Typically, broker-dealers will mark up the E&O-insurance cost as a profit center. Annual costs of $3,000 are now common. Deductibles are now typically $10,000-$25,000 range (in the past it was a $5,000 deductible).

If an advisor works with a broker-dealer that does a lot of business in REITs, BDC and alternative investments, E&O rates or deductibles on these products may be higher. However, some broker-dealers allow their advisors to buy their own E&O insurance, which is much cheaper without the broker-dealer's markup. With a good compliance history, advisors that do only mutual fund and variable annuity business with a Series 6 license can usually get E&O coverage for $400 annually. Advisors doing fee business may have to pay around $800-$1,200 annually. 

Payout ratios for firms are all over the map, and ratios within each firm likely vary across product types. The following is a list of the broker-dealers with some of the highest payout ratios in 2019. A range in the payout ratio column means the ratio varies depending on what asset class has been sold to the client. For example, the payout ratio might be 90% for mutual funds and 82% when a client purchases alternative assets. The complete list aggregating the fee range across all asset types and can be found at Financialplanning.com.

For financial advisors, the payout ratio is important when considering where to work or who to affiliate with, but it’s not the only metric to consider. It’s also wise to look at the culture and work metrics when considering your options.