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My 401K is tied up through my Employer and through their financial institution.

So your options are to buy what they are offering. Either I understood or not, i take what they are recommending.

I wonder, How they make their income? How do Financial advisors ( Wealth Management) make their commission?

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Investment advisers earn commissions in a variety of ways. Some charge a flat fee for managing your account, some take a percentage of your assets every year as their fee.

Some are agents of larger investment/insurance companies that get paid commissions and/or bonuses for selling their products. The financial companies make money through their products, such as fees for mutual funds or premiums for insurance.

For 401k plan managers, part of the fees are likely charged to the company instead of to you, which the company accounts for as an expense.

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    In my case, I see a monthly fee charge on my 401 K Statement. Each month, there will be two contribution ( two pay checks ). But fee charges are monthly. I dont know the purpose of that charge. I would imagine, that charge might be the broker fee
    – goofyui
    Dec 31, 2017 at 22:10
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    @goofyui The employer/401K plan has to create a annual set of documents that explain the performance of the funds and the fees for those funds. They should be able to explain the why and how employees are directly charged. Jan 1, 2018 at 13:56
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This can be quite complicated. A 401k plan involves a lot of complex record keeping and administrative overhead. You employer will probably engage another company to handle the administrative side of the 401k. In turn, the administrator will provide a selection of investment packages, which may or may not be controlled by the administrative company. For example, the 401k at my employer is run by "Company A", but they offer investments managed by "Company A", "Company B", and "Company C".

The companies providing the actual investment packages generally get paid by taking a cut each month of they money you have in the investment. When choosing an investment it's critical to find out how big a cut they are going to take, as that can significantly affect how much money the package makes for you. Ideally the administrator will be getting paid a fee directly by your employer, but some administrators get paid by getting fees from the investment companies chosen to participate in the plan. Your company and the administrating company have a fiduciary duty to look after your financial interests in the 401k, but it's still important to know how the administrator gets paid.

As part of the agreement with your employer, the administrator may offer some financial advisory services. The companies providing the investment packages may also offer financial advice, but generally don't have as clear an obligation to keep your interests foremost i.e. they may be allowed to sell you investments that make more money for them, but are not necessarily the best plan for you.

There are also financial advisors available outside of the 401k plan. They may operate on a fee for service basis, or by taking a cut of any returns from the investments they manage, or "for free!", which actually means they get paid by receiving a commission from the investment products they sell. Be careful to distinguish between "financial advisors" and "broker/dealers". Both can offer advice, but financial advisors have a fiduciary duty to you, and broker/dealers do not!

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Many advisers make money based on commissions, which means that their interests are not aligned with your interests. They make the most money from investments with large commissions. And, they have an incentive to get you to buy/sell often, which is to your disadvantage due to transaction costs etc.

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  • Yup. When a broke twenty something salesman tried to convert my investments from low turnover low management funds, it rang alarm bells. I hunted around and stumbled on two decamillionaires in the personal investments business who had no interest in my piece of the pie, and both of them recommended lower turnover lower management funds than I already had, and could point me at where to find them. It was a no brainer to fire the FA and roll every thing into better funds.
    – pojo-guy
    Jan 1, 2018 at 14:34
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    Yes. The three steps to investing are: (1) Put your money in a Vanguard Target Retirement fund (2) Relax (3) Relax some more.
    – Alex
    Jan 1, 2018 at 15:19
  • Indeed, one of the people I stumbled on to was @Alex John Bogle.
    – pojo-guy
    Jan 1, 2018 at 15:26
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    @Alex Why Vanguard? Why not some other company's low-fee target retirement fund? Your reason for mentioning specifically Vanguard wouldn't happen to be that you receive commissions from Vanguard, would it?
    – user
    Jan 1, 2018 at 16:03
  • Haha no, my only connection to Vanguard is as a customer, I promise. I mentioned Vanguard because they were the first and only for a long time, and that was the time period that I spent a bunch of time learning about investing. You're right, I think there are plenty of good options now, I'm just not familiar with them. I suggested the Target Retirement fund family specifically because it automatically adjusts as you age, but Fidelity etc probably also have similar funds.
    – Alex
    Jan 3, 2018 at 11:56
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If you are concerned about fees, one of the first things to check is fees charged by the investments themselves. Actively managed funds often charge a high enough percentage to wipe out the theoretical gains from improved investment selection.

Low-fee index funds aren't exciting. But YOU DON'T WANT EXCITING, you just want good rate of return ... and after fees, they often do as well as or better than the more expensive options.

Some 401k's come with a service that will help you pick a mix of these funds to suit your timeframe and how comfortable you are with risk, paid for by the employer.

If your employer doesn't offer that benefit, it is probably worth spending a bit of your own money to schedule a session with this sort of service. NOTE that while some "free" versions exist, they generally make their money from commissions on the products they sell you, which creates a conflict of interest which is better avoided; it's better to spend a hundred or three and know they are actually giving you the best advice they can. Recommending specific companies would be out of scope, but they aren't hard to find once you know what you are looking for.

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