Hiring a financial adviser is not unlike going to buy a new car.
Buy or lease? Bank or dealer financing? And just how is the dealership and the salesman getting paid? These are all good things to know.
You can know these things, but you have to ask. Here are a few ways financial advisers charge for his or her services. None of “wrong” or illegal, but there are important differences to understand in financial adviser fees.
First, there are commission-based advisers or discount brokerage firms. They charge a commission to buy, sell, or both. This can work out well if you rarely make changes to your accounts, say if you own low-cost index funds that reinvest automatically.
The problem arises when you’re being advised to buy or sell something and aren’t a seasoned investor. A good salesperson can make anything sound good or bad, regardless of how good or bad the investment might be.
Second, flat-fee investing is good for investors who want to implement a buy-and-hold strategy but want to do all the investing on their own.
Flat fees are typically less expensive than a fee based on an assets. You can get the portfolio advice from a reputable fee-only firm, pay the flat fee one time, and then go invest the money yourself.
The downside is you’re in charge of making any changes and of course, if you want additional advice, you need to make sure to set up another appointment with the advisory firm and get an update on the advice, after which you would pay another flat fee.
Finally, asset-based compensation structures work well for clients who want both advice as well as someone to manage their portfolio. In this model, the investor pays an ongoing annual fee equal to a percentage of the total investment balance.
This approach aligns your interests in the sense that the financial adviser benefits if you balance grows. The downside is that high annual fees rob your portfolio of returns steadily, while the adviser might not do much except sit back and watch it compound with the market.
Careful! “Fee-based” advisory firms confuse investors because the compensation structure sounds a lot like fee-only.
In reality, fee-based firms have a choice between charging commissions or another type of fee, such as asset-based, flat, or hourly.
Since the vast majority of financial advisory firms are set up this way, it’s better to eliminate the conflict of interest upfront by understanding clearly which fees you pay for what services, or just go fee-only.
Fees can vary wildly. Some investors pay up to 3% of their asset under management and as low as 0.25% if you have a huge investment balance, in the multiple millions.
In the end, you want to understand what you are paying and what you are getting. Multiply your investment balance by the percentage fee and that will give you a dollar amount.
Do you feel like you get the value of those dollars each and every year? If not, it might be time to consider alternatives.
MarketRiders, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.