06 Jul How Does Your Financial Advisor Get Paid?
So you’re considering hiring a financial advisor to help you invest and plan for retirement, but you’re not sure you can afford to pay someone to manage your assets. You know that no one works for nothing, and before you make the plunge and hire someone, you want to understand how your financial advisor actually gets paid. You want to be sure that you get what you’re paying for and that whoever you employ will do what’s best for you.
First, understand that there are many different payment structures out there, from fee-based to salary. Next, realize that how your financial planner is compensated depends on which products you purchase, which investments you make, and the size of your portfolio.
There are also different types of “financial advisors” as well, including registered investment advisors, stock brokers, and insurance agents. If you want someone who will make decisions based on your best interests and will disclose any personal conflicts of interest, then you’ll want to choose an investment advisor. Unlike the other types of financial planners, investment advisors are required to follow fiduciary practices, which means making sure their clients benefit before they do.
Brokers and Insurance agents are supposed to only recommend “appropriate” or “suitable” products to their clients, their primary allegiances may be to their employers and companies. Sometimes brokers or insurance agents will recommend a financial product that isn’t in the best interests of the customer because it could be profitable for himself, herself or the company they work for.
One thing is for sure; you’ll want to interview potential financial advisors and flat out ask how they will be compensated by assisting you. You want an advisor you feel will help you reach your goals. And you don’t want the way they’re compensated to sway how they advise you; this is called equity bias. Let’s take a look at the most common ways financial advisors are paid so that you can be more knowledgeable and prepared to choose the right planner for you and minimize the chances of equity bias.
Commissions
Even if you’re new to the world of financial planning, you’re probably familiar with the term “commission.” There are different types of commission:
- Front-end payment. This is usually a small percentage charged to you based on how much you’re investing.
- Back-end fees/DSC fees. Your advisor receives a percentage of what you invest, but he or she is paid directly from the investment company. (This is a great deal unless you withdraw funds within a specified time period; then, you get slapped with DSC fees. Click here for more information about DSC fees.)
- Trailer fee. This is an ongoing fee that your mutual fund directly pays your financial advisor. It’s usually a percentage (0.25% – 1.0%) each year that he or she oversees your account.
Fee-based Charges
Similar to how lawyers charge clients, financial advisors sometimes charge by the hour or by the task. They may offer packages that so you know up front how much you’ll be charged for specific services. Knowing what the flat fee is for the services you need or for a project you need to be completed is really helpful.
If you enjoy some control over your investments, you can pay someone by the hour to advise you while you execute his or her advice yourself. With this arrangement, a financial planner is likely to advise you more objectively, which is what you want.
There are more benefits to fee-based payment structures. You can simply hire someone only when you need them, so you don’t have to pay them on an ongoing basis. You can also pay a larger fee up front to get your financial plan in place and then pay a bit less once or twice a year when you “check in” with your planner to make sure everything is on track.
This may seem like a pretty fair deal, but if your financial portfolio is small (under $5000) you could be charged quite a bit in comparison to manage it ($1000 or more, which is sizable considering what you’re starting with).
Regardless, you’ll want to consider which areas a financial planner specialize in so that you can choose the best partner for your financial needs.
Retainer Fees
Retainer fees are not associated with any investments you buy and are usually paid in quarterly amounts on an ongoing basis. Paying your financial planner with retainer fees could be right for you if your portfolio is larger or more complicated because you have rental properties, own a small business, or have stocks. If you need to regularly withdraw funds from your investments, then paying your financial advisor through a retainer fee for continuing assistance can be a real benefit too.
Finally, because your advisor is working with you continually, you can expect him or her to be more objective and to consider what’s best for you over the long term. Remember to read the detailed contract carefully so you understand exactly which services are provided through your retainer fees.
Salary
Financial planners who are paid by salary are not compensated based on the investments you purchase. However, even though some advisors are paid a salary, it doesn’t mean that he or she will be less biased. If the advisor is offered volume-based bonuses or pressured to promote various financial products, then you still may not get the best advice. You still need to do your homework, ask questions, and research before making the decision about who you will allow to advise you about your finances.
The Bottom Line
There’s absolutely nothing wrong with asking for a clear description of how your financial planner receives payment, depending on which investments or decisions he or she recommends. You want to avoid making a potentially negative decision for yourself that would highly compensate your planner. It’s okay if it’s a win-win for everyone, but make sure that your advisor has your best interests in mind, not just his or hers.
The good people at www.russellandcompany.com work with both expertise and integrity, and rather than recommending what will be most profitable for them, they consider your financial situation, your age, and your goals to help ensure your interests are served.
This newsletter was prepared by a third party company to be used on the Russell & Company and Simple Money Tips for Women websites.
This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.
