How Financial Advisor Fees Work - Don't Be Afraid to Ask!
We have often been taught as children that asking someone how they make their money is fine while asking how much they make is inappropriate. However, the rules are different for financial advisors even though many people don’t ask how much the advisor will make. How the advisor makes their money and how much they will earn are both important questions because the answers may impact the advisors objectivity and recommendations depending on their compensation. There are two primary methods of advisor compensation: fee-only
. However, there are a number of variations of the two.
Fee-only advisors charge a fee for their services and the costs are upfront and paid entirely by the client.
How the compensation is calculated for their services may be hourly, a retainer or as a percentage of assets.
- Hourly rates vary greatly based on the advisor’s experience and location. Check with a couple of local advisors to get an idea of the range. An advisor, like a contractor, will estimate the number of hours to complete the project and provide an estimate of the costs.
- Retainers are generally paid up front for comprehensive planning services. They may be paid either quarterly or annually and may range from $2,000 to $10,000.
- As a percentage of assets means the advisor is compensated based on the amount of investable assets held. The fees generally range from .50% to 1.25% and adjust based on the size of the asset base. This method has great appeal to many clients because they feel the advisor has some skin in the game. As their investments grow the advisor earns a higher percentage while the client is earning higher returns and more money.
Commission advisors do not charge for the advice given or the planning provided. Instead they are compensated a portion of the initial investment in the form of a commission. A commission-only advisor will take the time upfront to explain these charges and how they work. The types of investments many of these advisors offer include packaged investment products such as variable annuities and mutual funds.
- These fees may range from 2% to 5.75% and there are discounts based on the size of the assets invested.
- In addition, the commission only advisor may receive ongoing 12b-1 fees which are deducted from the client’s account and will lower the overall return. These fees are paid to the advisor to defray any marketing and distribution costs associated with marketing the funds.
The financial services industry is like any other industry when it comes to its offerings. There is something for everyone and for those who need more options advisors are more than willing to accommodate. Ultimately, you will need to figure out what is the most equitable arrangement for you. In the world of advisor compensation variations, there are three different methods. They are Fee-Based
. In the fee-based arrangement, the advisor earns money by both preparing the financial plan and a commission for the investments placed. The fee-offset advisor will establish a base price for the plan that is created and then reduces the base price based on the investments made. In other words, the commissions created reduce the cost of the initial plan.The last variation of the advisor compensation model is a managed account advisor. These types of accounts are also referred to as a wrap account. In this type of arrangement, the client will pay a % fee based on the total assets under management. Typically, the advisor will charge around 2% of assets. These fees will cover the cost of the advisor, money manager, and commissions involved with purchasing individual stocks and bonds.
As with any business relationship, always read the fine print. Like any contract, words have different meanings and slight nuances may denote something completely different. Make sure to request the advisors Form ADV Part II (OMB #: 3235-0049) from the advisor. This document should provide a wealth of information and help you ask the questions you would like answered.
By InvestorGuide Staff