Good advisors can more than offset the fees they charge through money-saving financial planning moves, tax-efficient investing, and careful portfolio asset allocation. But it is important to make sure a fee structure matches your needs so you don’t pay more than you need to.
Fee-only arrangements are often best for people with complex situations who need ongoing advice and want to build a relationship with an advisor.
Andrii Zastrozhnov/DreamstimeHere’s a look at the various ways advisors get paid and when they make most sense:
Commissions. Some advisors who are licensed as brokers get paid per transaction by collecting a commission on the sale of a stock, bond, mutual fund, insurance policy, annuity, or other product. The commission is a percentage of the assets you invest in the product. Generally, commissions run from 3% to 6%.
If you aren’t looking for ongoing advice and need an advisor to carry out transactions, paying a commission may be the cheapest option. Keep in mind that a broker may be motivated to sell you a particular product because it kicks off a higher commission than another product that may be a better choice for your needs.
Fee-only. Fee-only advisors get compensated solely by fees, rather than commissions. They can charge different types of fees.
One common model is a fee that is equal to a percentage of the total assets the advisor is managing for you. The range is usually 0.20% to 2%, with the percentage decreasing on assets above certain thresholds. For example, say a wealthy client has $12 million under an advisor’s care. There may be a 1.5% charge on the first $3 million in assets, 1% on the next $3 million, and 0.35% on the last $6 million.
Another model, which is gaining in popularity, is the fixed “subscription” fee, which advisors charge on a regular basis, for example every month. Some advisors combine this model with the AUM model, with the subscription fee covering planning services and the AUM fee covering investment management.
A benefit of the fee-only structure is that advisors have less incentive to sell one product over another because they aren’t being paid a commission per transaction. Fee-only advisors are usually registered investment advisors (RIAs), who are registered with either their state securities agency or the federal Securities and Exchange Commission. RIAs are required to work as fiduciaries, which means they must place clients’ interests ahead of their own and either eliminate conflicts of interest or disclose them.
Typically, the fee-only arrangement is best for people with complex situations who need ongoing advice and want to build a relationship with an advisor. The ongoing fee may not make sense if you only have a few focused questions, such as how to invest in your retirement account or set up a college savings plan.
Fee-based. Advisors who advertise themselves as fee-based usually charge an ongoing annual fee that is a percentage of assets, similar to fee-only advisors, but may also sell certain products for a fee or a commission. These advisors are typically both licensed as brokers and registered as RIAs. They can be a good match for the investor who wants a diversified portfolio managed on a fee basis but who also inherited shares of a grandparent’s blue-chip dividend stock and wants to hold onto them. Putting that stock in a commission-based account could be cheaper.
Flat fees. If you’re looking for single or occasional planning sessions, many advisors will cater to this need by charging a flat fee or an hourly fee. For anyone who needs help establishing or revising a financial plan but doesn’t foresee needing ongoing advice, this can be an ideal fee structure. A flat fee for a one-time session to, say, create or revise a financial plan typically ranges between $2,000 and $4,000. An hourly service to address more specific issues generally will run $200 to $400 per hour.
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