When it comes to managing your money, your financial advisor plays a crucial role in how assets grow over time. Of course, you will find that you have to pay for their time and expertise, but not all financial advisor fees are created equal. There are several different methods to collect payment for services rendered, and you should be aware of which one is the right fit for you.
This guide will walk you through the various types of fees implemented for this service and help you choose the right advisor from the start.
Types of Financial Advisor Fees
You may be surprised to learn that there are five different ways that a financial advisor could get paid for the same services. Knowing the ins and outs of each one allows you to keep more money in your pocket while still getting the help you need for the long-term growth of your assets.
Fee-Only
Fee-only services may be the most well-known form of payment structure. Under this model, an advisor will charge a fee for their advice, most notably as a percentage of your assets under their management (AUM). As long as you continue to work with your financial advisor, they will collect their payment expressed as a percentage of your portfolio annually, quarterly, or monthly.
This means that with a fee-only advisor, their fee may grow over time if your assets are profitable, though the percentage will always remain the same. This type of arrangement is always a fiduciary relationship since the advisor must be with a Registered Investment Advisor to legally do so.
Performance-Based Fees
Performance-based fees piggyback off of fee-only services. Not only are you charged a fee for the assets under management, but you will also be subject to performance fees. If your portfolio hits a pre-determined benchmark, you will pay out this additional fee. You only pay it if your portfolio grows, so it is an incentive for your advisor to work hard.
Commission
Some financial advisors receive a commission from selling specific mutual funds or annuities. The company that offers these investment products will be the one paying the advisor whenever they recommend their products and include them in your portfolio. You may find that you will get hit with penalties for trying to cash out early from a commission-based product.
Keep in mind that when the advisor gets paid to recommend a specific product to you, it’s not always because it is in your best interest. Unless they are a fiduciary, they may be recommending the product because it is in their best interest. This is why it is beneficial to ensure that you work with a financial advisor who is also a fiduciary.
Flat, Hourly, or Project Fee
If you have fewer assets or are winding down your savings in your golden years, then it may not make sense for an advisor to charge based on assets under management. Instead, you might pay a consistent fee regardless of how your assets perform. This is the most straightforward type of payment.
You may pay hourly or a flat rate for a consultation. Project fees could be levied if you are using their services for a specific event that has a clear start and end point (such as saving for a child’s college fund, wedding, or down payment for a house).
Hybrid
In some cases, a financial advisor may collect fees in a variety of ways. Hybrid fee schedules utilize a fee-based service for assets under management and commissions for recommending a specific product. This can be trickier to estimate and calculate, so be sure to ask for clear numbers. If they sidestep your questions instead of offering clarity, you may want to reconsider your relationship with them.
An advisor who is charging a fee must be a representative of a Registered Investment Advisor, and as such, undertakes a legal fiduciary duty. If he/she also collects a commission on a separate product, say long-term care insurance for example, then he/she should disclose the fact to the client.
Must-Have for Choosing an Advisor
With all of these fees on the table for services rendered, how can you go about choosing the right professional who will meet your needs? Consider some of these must-haves before you sign on the dotted line to put your assets under a company’s management:
- Fiduciary: It is incredibly important that your financial advisor also be a fiduciary who looks out for your best interests. This is a legal obligation to act in your best interest, even if they can make more money by recommending a different course of action.
- Credentials: Anyone can hang out their shingle as a financial advisor, so be sure to ask about their background and credentials. They could be a CERTIFIED FINANCIAL PLANNER™ (CFP) or a Certified Public Accountant (CPA). They may also have licenses and certifications as investment professionals.
- Transparency: Is there anything worse than asking what you might owe and not getting a straight answer? A financial advisor should be willing to explain the fee structure clearly and plainly, and there should be no hidden fees lurking beneath the surface.
- Communication: If you will be working with someone for a long time, you want to make sure you like them as a professional. They should be easy to get in touch with. When you do speak with them, make sure they truly listen and take time to understand your goals.
Chart Your Course with Magellan
Are you ready to meet with a financial advisor who has your best interests in mind? Magellan has comprehensive estate, tax, legal, and financial planning available all under one roof to make it easier than ever to manage your money. We act as fiduciaries and investment professionals who can help your assets and investments grow, while not losing sight of the need for safety and security.
Reach out to us today to learn more about how we can help you take the first step to plan for your financial future!
For a comprehensive review of your personal situation, always consult with a legal or tax advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.