Do you have a financial advisor? If so, do you know how he or she charges?
Whether you have a financial advisor or have just begun considering hiring one, there are a few things you need to know. Not only is it vital to find a financial advisor who can provide you the performance and service you are looking for, but you must ensure they fit your budget.
Unfortunately, how financial advisors charge can be a little tricky. There is a large variance – some advisors charge an hourly rate, while others take commission. Some even take a percentage of your total account value.
The most common ways financial advisors charge their clients are listed below:
1) Percentage of total account value
2) Flat fee
3) Commissions paid through a third party financial or insurance product
4) Retainer fee
5) A combination of fees and commissions. This is often called fee-based.
6) Hourly rate
To learn more about each type of charge, continue reading below:
1) Percentage of Total Account Value
Charging a percentage of your total account value is one of the most common ways a financial advisor will claim their payment.
Typically, these rates occur anywhere from 1-2% of your total account value.
Before you hire a financial advisor who is compensated by a percentage of your total account value, ask exactly what services they will be providing. Some financial advisors in this situation only provide investment management, but not financial planning. If you’re looking for both an investment and financial planner, you may be charged additional fees if it’s not already included in their rate.
It’s not surprising that this is the most common ways for financial advisors to charge. Think about an advisor charging 1%. If they have ten clients who each have approximately $1 million in net worth, they are making approximately $100,000 a year. There’s a reason many advisors have a minimum net worth threshold you must hit before you can become a client.
2) Flat Fee
If you are just looking for advice on a specific aspect of your finances – such as retirement – it may make sense to pay a flat fee. With a flat fee, you can hire a financial advisor to assist you on a project basis.
A flat fee works well for people who have a specific financial area they need help with. It also serves as a great introduction if you are trying out a financial advisor, but aren’t committed to letting them manage your entire portfolio. Just be sure to negotiate rates on the front-end so there are no discrepancies.
3) Commissions Paid Through a Third Party Financial or Insurance Product
Commissions are one of the most common ways that financial advisors charge for their services.
Commissions often cost you less, however, it’s important to trust your financial advisor. Many financial advisors who operate on commissions simply act as salespeople – they are trying to see you products and services because they receive commission from doing so.
It’s important to ask questions, especially if you are feeling like you are being sold to. Sales aren’t necessarily bad – plenty of people receive commission for offering valuable products are services. However, you want to make sure what they are offering is actually of value to you and that they aren’t trying to make a sale simply for commissions.
4) Retainer Fee
Retainer fees work well for people or businesses with more complex financial situations – for instance, a startup that needs periodic financial consulting.
With a retainer agreement, you pay what is usually a quarterly or annual fee to have a financial advisor available to you when you need one.
5) A Combination of Fees and Commission
Today, many advisors can collect both fees and commission. This is often referred to as fee-based.
The difference between fee-only and fee-based advisors is that fee-only advisors cannot collect commissions.
6) Hourly Rate
The hourly rate charge is fairly straightforward – financial advisors charge you for every hour of their time.
For instance, if you meet with your financial advisor to discuss how to allocate your retirement plans, you will be charged for each hour you spend at the office. Some advisors will even charge on the half- or quarter-hour basis, so be sure to track your time if you’re concerned about cost.
An hourly rate can quickly become costly if you like a more hands-on financial advisor or someone who will always be available to answer your questions (don’t worry if you fall into this category – there are plenty of other options!). But if you are someone who wants to learn from a financial advisor and implement their suggestions on your own, an hourly rate could be an ideal option.
Like many industries, the hourly rate of financial advisors varies drastically depending on their experience and location.
How Do You Know How Your Financial Advisor Charges?
Don’t be shy – if you’re unsure of how your financial advisor will charge you, simply ask!
A good financial advisor will know their fee agreements can be tricky to understand. If you’re talking with someone who seems hesitant to answer or is less than transparent, you may want to consider continuing to shop around for a financial advisor.
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