Searching for the right financial advisor for you can be a very daunting task. There are more than 600,000 financial professionals in the U.S. who hold themselves out as some sort of financial advisor, using titles such as “financial planner,” “investment manager,” wealth manager,” among many others. The fact is they can call themselves just about anything they want; but their titles tell you very little about the quality of advice you will receive. However, if you know how the advisor gets paid, you’ll know what to expect in terms of type and level of advice the advisor can offer.
There are three ways financial advisors get paid:
- Percentage Fees
- Flat Fees
Percentage Fee Advisors
Some financial advisors charge for services based on a percentage of your accounts that they manage. This method is known as Assets Under Management. The fees can range from 0.25 to 2.5 percent depending on the amount of assets or preference of the advisor. It is an annual fee that is often billed quarterly. For a client with $500,000 of assets in an account, the amount of the fee might be $5,000. Advisors work with their clients to develop an investment strategy and sometimes a financial plan as well, although many advisors state their fee for this service is only the investment advice. In addition, the client can receive performance reports and portfolio reviews meetings to discuss their strategy going forward.
Flat Fee Advisors
An increasing number of financial planners are now beginning to charge a flat retainer or hourly fee instead of annual percentage fees. The amount of the fee can be based on the complexity of the client’s situation, the amount of time taken and the experience of the advisor. While this flat fee is easily understood by clients, it can introduce the questions of “Did my advisor quote me the right amount for my situation, and what happens if they are slow with their work – am I paying them for too many hours?”. There is no perfect fee solution, but the flat fee can work better for many people.
Advisors who work for a securities firm or broker-dealer are compensated by their firms in the form of commissions. Commissions are earned upon the sale of investment and insurance products. For example, when a broker sells a client a mutual fund for $50,000 with a 5 percent sales charge, the broker and his firm split the $2,500 commission. With some investment products, the sales charge is not charged up front, and could be paid while they hold the investment or upon its sale. These methods of commissioned payment mean it can be confusing for clients and they can often wonder if the products being sold are in their best interest or because the commission is great for their advisor.
Commission-based advisors are not fiduciaries, which means they are not required to offer investment products that are in their client’s best interest. They have to offer products that are suitable, but that could mean selling a mutual fund that has a commission that is double what another suitable product would charge. Once clients purchase an investment product, commission-based advisors are not obligated to provide ongoing service.
Which Type of Advisor Is Best For You?
The answer to this question depends entirely on what it is you are looking for in a financial advisor. For example, if you have several hundred thousand dollars or more to invest and are looking for authentic, objective and conflict-free advice, you would want to work with a fee-only or flat fee advisor who is a fiduciary.
If you don’t have that much money to invest and you have a good idea of the type of investments you want, a commissioned-based advisor might suffice. Rather than paying annual fees, you pay a commission for the investments you want. Alternatively, you could invest directly with large fund groups such as Vanguard, Fidelity, or Schwab who offer a wide range of no- or low-load investment options.
If you need an advisor to develop a comprehensive financial plan, which you expect to implement by yourself or through other advisors, your best bet is to find a Certified Financial Planner ™ (CFP®) who charges a flat or hourly fee.