Do You Know the Cost of Your Financial Advisor?

Do You Know the Cost of Your Financial Advisor?

People often contemplate whether it is worth it to hire a financial advisor and many a time even challenge themselves by taking care of their finances themselves. An investment to hire an advisor often pays for itself as a financial advisor who possesses essential financial literacy and knowledge can help you navigate through the financial market by choosing the right investments and creating the right investment portfolios according to your situation that will enable you to build wealth, maximize returns, and enjoy financial security.

Simply put, all financial advisors provide financial advice or recommendation to their customers for compensation. However, there is no one-size-fits-all compensation option for advisors. The best approach to avoid any confusion is to educate yourself and understand how the financial professionals work and get paid for their services.

Most common ways a financial advisor is compensated.

  1. Fee-only

    Few financial advisors, primarily the ones serving fiduciary responsibility, operate on a fee-only model. The registered investment advisors (RIAs) or fiduciaries who work on the fee-only model and do not sell any investment instruments or products such as life insurance, annuities, etc. nor do they accept a commission.

    Such financial advisors work for the best interest of their clients and get compensated either on an hourly rate, a fixed annual retainer or a percentage of the account or asset they manage. They provide financial recommendations which are independent of any financial products they recommend, keeping in mind their clients best interesting the first place.

  2. Hourly rates

    Some financial advisors provide recommendations and get paid on an hourly basis. If you are a self-starter who knows how to implement financial recommendations on your own, then it is an excellent option you may want to consider.

    An advisor who operates on an hourly fee model is not responsible for executing transactions or placing suggestions for you; neither are they tied to a particular value in the form of commissions or asset management fee; hence recommendations from such sources can be reliable and objective.

  3. Commission-based Fee

    Some advisors charge their clients a specific commission on top of the asset management fee. The fee for such advisors varies and mainly depends on the client's specific requirements. Make sure you ask for a breakdown of the total cost which includes both the fees and commission to ensure that the splits are fair and accurate.

  4. Fixed/Flat Rate

    The other option by which financial advisors get compensated for their services is a flat/fixed fee rate, which is usually based on a specific project. For example, if you are looking for a particular financial plan such as a retirement plan, then you may have to pay a fixed fee to your advisor. In this case, the advisor will analyze and evaluate your financial situation to guide you with the next steps or make wise investment recommendations keeping in mind your retirement time horizon.

    Since it's a one-time payment, make sure that you discuss the fee upfront with your advisor along with the detailed plan of the services that will be provided.

  5. Percentage of Account

    It is one of the most common ways for a financial advisor to charge his fee against the services he provides. This payment option is quite transparent as it is tied to the net worth of the assets. Your advisor is likely to make more money if your account grows and on the other hand, he/she will make less money if the net worth of your asset dips or goes down.

    A financial advisor typically charges somewhere between 0.5 to 2 percent annually for assets managed. However, if you have more assets to be managed, the lower the fee will be.

    Also, make sure to check if your advisor charges a fee-only or fee-based option. Fee-only advisors tend to use low-cost funds which also minimizes your payment burden. And, fee-based advisors are the ones who collect commissions in addition to the percentage fee charged on the assets they manage.

    It is always difficult for an investor to evaluate and understand all aspects of the fees and expenses and take an appropriate decision when hiring a financial advisor. So, be straightforward and ask your advisor on how they would like to be compensated for their services and in return look out for a simple and honest answer. Whichever option you may choose to pay your advisor, ensure that you have documented statements for the promised services and commission, before you kick-start your engagement with an advisor.