How Are Financial Advisors Compensated in the Czech Republic?

Financial security, which today means freedom and opportunity, is something each of us deals with in some way. It’s perfectly normal to turn to employees of financial institutions or financial advisors for help in these matters. The advantage of today’s world is the privileged position of the client, who can choose the mode and method of communication that suits them best when managing their finances. Sometimes, a financial service may appear free at first glance, which is why it’s good to understand how financial advisors are compensated behind the scenes.

Let’s begin by dividing the types of financial services, where we currently distinguish four levels in the financial world:

1. Financial Institutions

If you need to use a financial product, such as a loan or insurance, statistically you would most likely turn to a financial institution like a bank or insurance company. At the counter, they will offer you the best product—but only the best within their own portfolio. They won’t tell you that the bank across the street offers better terms, nor will they explain the pros and cons of different loans or accounts.

At the end of my first year of university, I walked into the bank where I had a checking account, asking to invest my saved CZK 50,000 (EUR 2,000). They offered me an investment with a 3% annual return, saying it wasn’t guaranteed and might not earn anything. When I asked, “Isn’t there something better?” I was told they currently had nothing better.

• Product Comparison

An increasingly popular service is financial intermediation. With the development of IT technologies, we commonly encounter intermediaries who offer the public comparison services online across multiple providers. You’ve probably noticed this due to the strong marketing of these companies—it could be various types of insurance, loans, savings accounts, and so on. The price for this seemingly free comparison is, in most cases, your contact details and consent to be contacted.

• Financial Intermediaries

Financial intermediaries operate as independent members of the financial market, which they understand well. As part of their service, they offer you the best deal and their expert opinion on financial products. In other words, they explore and compare the entire market and then select the best product. The better ones are deeply knowledgeable about the products and can provide qualified, tailored advice.

I believe that if I had visited a quality intermediary instead of the bank, I would have been more informed about the world of investments and started rational investing earlier.

Comprehensive Service

But would that have been the right decision? I didn’t have a financial reserve, had an uncertain part-time job, and was planning my first business. The intermediary wouldn’t have known that, because their motivation is usually product sales, not financial analysis. The best financial decision would have come from someone who understands my situation. That is, someone who provides a comprehensive financial service—the third category. The goal of a comprehensive service is to identify the client’s needs, goals, current status, and create a tailored plan so they can achieve their goals sooner and more affordably. In my case, they would have told me about social scholarships, student loans, taught me to save more, prepared capital for my own housing or additional funds for a carefree retirement.

So how are professionals in the financial field compensated at each level?

Let’s briefly touch on the compensation of employees in financial institutions in sales roles. In the vast majority of cases, the employee has a fixed salary in their employment contract, to which a variable component is added, determined by criteria set by the employer. These are designed to measure the individual’s work results, which naturally relate directly or indirectly to the company’s profitability—be it a bank or insurance company. In its basic and most common form, this takes the shape of a sales plan, where the employee with the highest sales volume earns the most.

Fixed salaries do not exist for sole proprietors in the financial services sector who operate independently across the entire market. An exception is multi-level marketing financial systems, which pay their newcomers a minimal salary for the first few months. However, they do this because it benefits those in higher positions. It’s simply a recruitment motivation strategy used by these companies.

As a client, it’s important to know that in the realm of financial service or product intermediation, there are three models of advisor compensation for their time and advice to you. These are commission-based advising, fee-based advising, or a combination.

1. Commission-Based Advising Model

Financial institutions pay a pre-agreed commission to the financial advisory company for arranging financial products, and after deducting their margin, the company pays the contractually agreed compensation to the financial advisor.

For some financial products, the advisor receives a commission under a clawback condition. This applies to life insurance, where the advisor is liable for five years from the start of the contract—if the contract is canceled within five years, they must return a proportional part of their commission. It also applies to housing loans: if the loan is not drawn or is repaid within three years, the advisor returns their compensation to the financial institution.

Advisors are thus motivated to care for the client over many years to avoid losing their earned money. For clients, the advisor’s service in this model is completely free.

2. Fee-Based Advising Model

The financial advisor has a fixed price list for their clients, e.g., for creating a financial plan, consulting a specific issue, building an investment portfolio, performance-based fees, or regular investment management fees. The client knows in advance what they will pay and for what. It’s similar to hiring a lawyer or tax advisor. In this model, the financial advisor is not dependent on whether the client signs any of the recommended contracts.

3. Combined Model

A financial advisor who combines institutional commissions with regular or one-time fees from the client can offer services with a balanced approach, where their motivation is tied to the success and satisfaction of both parties.

In conclusion, I’d like to emphasize that transparency is essential in every fair service! Especially in financial services, it’s important to know the hidden cost of a service in advance so that we realize how the form of compensation can influence the person advising us on finances and how they are motivated in their work. Because how a financial professional is compensated for their work is directly related to the quality of their service and affects their approach to client care.

Note: All Czech crown (CZK) amounts were converted to euros (EUR) using a fixed exchange rate of 25 CZK = 1 EUR.