Understanding Asset-Based Advisory Fees
Financial advisors can add incredible value to your financial plan. With expertise and considerable knowledge of the investment world, economy, and people’s financial needs, these professionals can be an asset for investors. However, just like all other things, financial advisors also come at a cost. In most cases, their varied services and continued assistance in helping you create wealth are likely to negate the associated costs. But it is still good to know where your money is being spent. Financial advisors charge in different ways, like commission based fee, hourly rates, flat rate charges, expense ratio fees, etc. Asset and fee based financial services is also a method through which a financial advisor can charge you.
This article talks about asset-based pricing, how a financial advisor charges using asset based pricing, and if it is a suitable mode of payment for you to opt for.
What is an Asset-Based Fee?
Asset-Based Fee Definition: When you consult a financial advisor, they charge you a fee in return for their time, suggestions, and recommendations on your financial plan, savings strategy, investment options, tax planning, retirement preparation, etc. An asset based fee is one method that a financial advisor can use to charge their clients. An asset based fee is a fee charged as per your assets under management, also known as AUM. In simple words, this refers to the assets that the financial advisor manages for you. Most advisors opt for a fixed figure that can range between 1% and 2% of the value of the total number of assets that they monitor, buy, or sell for you. For instance, if your financial advisor manages assets worth $50,000, they can charge anywhere between $500 and $1000 as their fee. Financial advisors may charge a monthly or annual asset based fee according to the total number of assets on your portfolio at a given time.
What Factors Influence Asset Based Pricing?
There are several aspects that can alter the costs of asset based fees. Financial planning strategies, number of years in the industry, experience and acumen, as well as the advisor firm a professional works for can determine the final cost of their services. Typically, the fee tends to decrease with an increase in the value and number of assets. Some advisors also use benchmarks to establish a fee. For instance, assets worth $1,00,000 may come at the cost of 1%. However, anything beyond this may come at a lower percentage cost.
What is the Difference Between Asset and Fee Based Financial Services?
Now that you know what an AUM fee or an asset based fee is, we can now compare it to fee based financial services. Under fee based financial services, financial advisors charge a flat rate for their services. The fee is generally pre-determined at the time of hiring the advisor and remains the same throughout the duration of your contract. Fee based advisors can charge you by the hour or fix a figure for monthly payments. In the case of daily trades or actively managed portfolios, the fee may be decided based on the assets under management.
Is the Fee Based on the Account Size and the Commissions Based on Transactions the Same Thing?
Yes and no. First, the answer is often yes, because there are many more registered brokers in the U.S. than there are registered investment advisors, and therein lies the difference. When a broker charges a fee they are charging you “in lieu of commissions”. So, in this case, it does mean the fee is just another way to pay your broker. This approach has two important features, one good and one not so good. The good is that it eliminates the incentive for the broker to be a promoter of transactions. The bad is that many investors become confused, which makes you think the fee is for advice or management, when it is not. It is very important to remember that if you are doing business with someone who is functioning as a broker, rather than as an investment advisor or manager, then they are regulated under the law as a salesperson. Hence, you must always see the fine print of your contract.
The answer to this question can become an emphatic no, if you are dealing with a representative of a Registered Investment Advisor (RIA). In this case, the fee is not in lieu of commissions, rather, it is a management or advice fee that compensates for a variety of professional services, none of which is compensation for selling securities or advocating transactions. This approach has several important features, such as personal and objective investment advice, a relationship with an investment professional rather than a professional salesperson, higher level reporting including performance reports and a commonality of purpose, meaning your advisor and you want the same thing — to see your assets grow as opposed to asset “turn-over.” In this case, you will also be dealing with a licensed person who is paid for advice rather than activity. Interestingly, brokers often charge “in lieu of commissions” fees at rates that are as much, or more, than those charged by a legitimate advisor.
How to Hire the Right Financial Advisor for Your Needs?
In order to hire the right financial advisor, you need to ask certain questions.
- The first question you should ask anyone in the investment business is on the subject of experience and qualifications. This can help you gauge the professional’s caliber.
- The second should be to find out if the advisor functions as a broker or a fiduciary (RIA representative).
These questions can help you know what you are paying for.
Can You Reduce the Costs to Hire a Financial Advisor?
Fortunately, there are ways to lower the expenses incurred in hiring a professional. These include:
- Be clear about what you are looking for: It helps to know what you are expecting from an advisor before you hire someone. An honest conversation on your requirements and an understanding of the financial advisor’s fee structure will help you pick a professional that fits into your budget as well as aligns with your investment preferences.
- Inquire about the fee structure: Before signing a contract, make sure to ask the financial advisor how they will charge you. Read the contract carefully for any hidden costs. Understand the final outcome of a flat rate or an asset based fee on your investments. Sometimes figures may seem acceptable initially but they can translate into something that is far from your budgetary range when applied.
- Choose suitable investments: The cost incurred on each type of investment is unique. Expense ratios, administrative costs, etc. of mutual funds and exchange traded funds can differ from stocks or bonds. If you do not wish to incur additional costs, pick investments with the least expenses.
- Pick a shorter contract: You can always switch from one financial advisor to another, if you are not satisfied with their services. Do not sign a long contract if you are not convinced about the acumen of the financial advisor. Do a trial run and then move to a longer association based on the investment success you experience.
- Look at the bigger picture: Concentrating on returns or expenses alone may not give you the real picture of your earnings. Try to look at each aspect as a combination. Your net returns matter the most. So, the remainder of your profits after deducting the fees, taxes, etc. should be the determining factor when hiring a financial advisor.
To Sum it Up
The choice between asset based pricing and other forms of payment depends on your requirements as an investor. For instance, if your investment acumen and experience in investing is high, you may not need an advisor for continued assistance. On the other hand, investors who are not as well-versed with the financial world may require round the clock help. The size of your portfolio and its asset value also play a crucial role here. The figures, that are around 1% or 2%, may seem small and negligible on paper, but if the value of your portfolio is high, these expenses can be astronomical. Therefore, it helps to understand your goals and needs in depth so you can hire someone who is able to contribute to your financial growth and not cut it back.
Reach out to a financial advisor who can not only guide you in achieving your financial needs and goals, but also one who follows your preferred method of payment. Our free match service helps you find 1-3 financial advisors who fit your requirements, and can be contacted for a free initial consultation before making your decision to hire.