Sources of revenue: Provide gross annual revenues from financial planning, advisory activities, and commissions from the sales of securities and/or life and health insurance received by all covered individuals and entities.
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Why the carrier asks
This question helps the insurance carrier assess your firm's risk profile by understanding the scale and nature of your revenue. The total gross revenue indicates the size of your practice, while the split between fee-only and commission-based revenue highlights potential conflicts of interest. Commission revenue can suggest a higher risk of suitability-related claims. This data allows the underwriter to evaluate your exposure to claims related to your revenue practices and business model.
Key terms
- What is "Gross Annual Revenue"? This is the total income your firm receives before any expenses are deducted. It includes all revenue from financial planning fees, advisory fees, and commissions from sales of securities or insurance products.
- What is "Fee-Only Revenue"? This is income you charge directly to clients for your advice or services, such as hourly fees, flat fees for a financial plan, or a percentage of assets under management (AUM). It is not tied to the sale of a product.
- What is "Commission Revenue"? This is income you earn from the sale of financial products, such as securities, annuities, or insurance policies. The payment is tied to the transaction.
How to answer
To answer this question, you will need to provide a breakdown of your firm's revenue for three periods: your last completed fiscal year, a projection for the current year, and a projection for next year. For each period, provide the following information in the table format shown below.
| Fiscal Period | Total Gross Revenue | % Fee-Only Revenue | % Commission Revenue | # of Financial Advisors |
|---|---|---|---|---|
| Last Year End | $_______________ | _______________% | _______________% | _______________ |
| Current Year (Proj.) | $_______________ | _______________% | _______________% | _______________ |
| Next Year (Proj.) | $_______________ | _______________% | _______________% | _______________ |
- Total Gross Revenue: Enter the total revenue figure for the period.
- % Fee-Only / % Commission: The percentages for these two columns should add up to 100%.
- # of Financial Advisors: Enter the number of advisors contributing to the revenue.
- Projections: Estimates for the current and next year are acceptable, but they should be reasonable and based on your current business trends.
Common mistakes
- Mistake: Confusing gross revenue with net income.
- This question requires your firm's total "top-line" revenue before any salaries, rent, or other expenses are paid out.
- Pitfall: Providing unrealistic projections.
- Your projections for the current and next year should be based on reasonable assumptions (e.g., historical growth, new client pipeline). Wildly optimistic or unsupported projections can be a red flag.
- Mistake: Incorrectly categorizing revenue.
- Be clear on the difference between fee-only and commission revenue. A fee based on assets under management is "Fee-Only." A payment received for selling a mutual fund or insurance policy is "Commission."
Frequently asked questions
What if our fee-only and commission percentages don't add up to 100%?
This would imply you have other sources of revenue not captured by these two categories. If so, you should make a note to explain the other sources. However, for most financial advisory firms, these two categories should cover nearly all professional revenue.
What happens if our revenue is projected to grow significantly?
Be prepared to answer follow-up questions about the source of that growth (e.g., new clients, a merger, new services) and how your firm's compliance and operational resources will handle the increased scale.
We are a new firm and don't have a full "Last Year End" of revenue. What should we do?
You should provide the revenue figures for the period you have been in operation and make a note of it. For example, "Last Year End (6 months of operation)."
This guide explains what application questions generally ask and how carriers tend to read the answers. It isn't legal advice or a coverage determination: your carrier's application and policy wording control. When you're unsure how to answer, ask your broker before you sign.
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