Oftentimes, individuals prospecting for a financial advisor ask me what the “fee” or cost” would be for an advisor. I explain to them there are multiple ways an advisor can receive compensation and they must be familiar with the differences when selecting one.
1. Fees from percentage of assets- The assessment of annual cost based on a percentage of assets held in an account is one of the approaches to compensation with a financial advisor. Typically, an advisor will sign a document with the client agreeing upon a certain percentage of their assets to be paid to the advisor on an annualized basis (typically between 1-2 percent of assets).
2. Commissions- Advisors “paid on commission” receive compensation typically from mutual fund companies, insurance companies, real estate investment companies based on the sale of their products. The commission may or may not be directly charged to the client, depending on the product. Clients should be aware of these compensation agreements.
3. Combination of fees and commissions- Many advisors today are considered “fee based” where they receive fees and commissions. These advisors will use a combination of feed advisory accounts and commission or commission based products to build the clients portfolio.
4. Hourly Rate- Some financial advisors will provide advice in investing by the hour. They will give the client advice on how to allocate their portfolio and the client does the investing themselves or takes their plan to a qualified advisor for implementation. The hourly rate varies by experience and advisor. When dealing with an hourly advisor, find out what the hourly rate is and what they are providing in a consultation.
5. Flat fee for a specific project- Many prospects are searching for financial plans of a certain type. Babyboomers looking for retirement plans, Millennials looking for college plans, etc. Financial planners and financial advisors can be contacted to provide a roadmap or plan for life goals at a specified fee. Clients need to make sure they understand what is included in the plan and what follow up is covered by the specified fee.
However your advisor is compensated, you should feel free to inquire and always be informed. The knowledge of services and abilities of your individual advisor will help you in understanding what to expect.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.