Economics of an Advisory Business:
How Does an Advisor Get Paid?

Dec 9, 2022 | Advisory Solutions

Most advisors in Canada are registered with two self-regulatory organizations, which will merge at the end of this year: the Mutual Fund Dealers Association of Canada (MFDA) or the Investment Industry Regulatory Association of Canada (IIROC). The firms they work for take a cut of the revenue they produce. The revenue split between the firm and the advisor is what we’ll briefly look at today.

Three key variables impact how much money an advisor (and their firm) makes:

  • Assets under management (AUM): AUM is the total assets managed by the advisor (or firm). The higher the AUM, the better for business revenue.
  • Fee: An advisor charges a fee to clients to manage their portfolios in fee-based accounts. The higher the basis-point fee, the better for business revenue.
  • Compensation grid: Each firm has a compensation schedule that outlines the percentage of an advisor’s revenue that goes to them and the percentage that goes to the firm. The higher the percentage that goes to the advisor, the more an advisor earns, and the less the firm retains.

Of the above three variables, it’s basis-point fees and grid levels that can significantly impact an advisor’s payout. The examples below illustrate the differences.

When it comes to the numerical aspects of take-home pay, advisors can face tough decisions about the dealers they work for and the platforms (MFDA or IIROC) they operate their business on. Both have competing pros and cons associated with low to generous grid levels. In addition to payout, advisors have other issues to consider when running a business profitably: efficiency, scale, technology, client-acquisition and service costs, and more. For many, these are not quick and easy decisions, especially as lower-cost advice alternatives continue to shape and shift advice business models and, thus, advisors’ ability to generate revenue.