If you’ve ever wondered, “How does a financial advisor get paid?” you probably already know that the answer is difficult to find. Financial advisor fees can be calculated using a variety of different methods. They can change depending on the company, the type of service, and even the individual financial advisor. When you boil it down, there are six ways that financial advisors charge fees.
Account Management Fee aka Percentage of Assets
Many financial advisor’s fees are calculated by the amount of money they are responsible for managing. Their fee is usually between 1-2% of the total amount of the client’s account annually. As the amount of assets grows, the fee decreases. For example, a financial advisor may charge 1.5% to manage $200,000 or less, and charge 1.25% to manage more than $200,000. This type of fee often works best for people who want to transfer all the responsibility of their finances to an experienced advisor.
Financial advisors associated with insurance and brokerage firms are usually paid on commission. This means they get paid a percentage of whatever product you buy. Financial advisors who are paid on commission usually earn bonuses as they achieve more product sales. This method can make it hard to distinguish between a person who is a good advisor and a person who is just a smooth salesperson. Advisors who are paid on commission are the most likely to make recommendations based on what they’ll sell, rather than what you’ll need. However, there are many very reputable advisors who make their money on commission. For example, both State Farm and Edward Jones are commissions-based firms.
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A Combination, or Fee-Based
Nothing in the finance industry is ever simple, right? It’s not uncommon for a financial advisor to be paid in a combination of fee methods. For example, a financial advisor might offer hourly services and still get paid a commission based on the products he or she sells. These advisors are commonly known as fee-based advisors, not to be confused with fee-only advisors, who pledge never to collect commissions on top of their advising fee.
Some advisors charge an hourly fee for their time. Hourly rates work great for someone who wants expert advice on a specific topic, and who is willing to take on responsibility for implementing the action steps. For example, you could pay a financial advisor an hourly rate to recommend how you diversify your retirement portfolio. After getting the advice, you would be responsible for actually putting their recommendations into action. With an hourly fee, you can feel confident that you’ll receive the advisor’s unbiased opinion, since the rate isn’t based on a purchase. One downside is that hourly fees can vary greatly between different advisors. You’ll want to do your research and ask about fees before scheduling an appointment.
Project Specific Flat Fee
Specialized advisors may charge a flat per-project free. Flat fees are typically the easiest way to calculate the cost of hiring a financial advisor. Your advisor can usually quote you a flat fee up front based on your needs. A project might be initial retirement planning, estate planning, or a strategy for educational savings. Just as with an hourly rate, a project specific fee can help reassure you that you’re getting an unbiased opinion from your advisor.
Sometimes a flat fee just won’t cut it, because you need more attention. In complex situations that require ongoing advice, a retainer fee is a good option. Retainer fees are similar to flat fees in that they are not tied to a purchase or to asset value. The client pays a quarterly or annual fee in exchange for regular financial advice. The fees are usually based on the types of services that the advisor would need to provide based on the situation.
Reducing Conflicts of Interest
Fee methods can influence the recommendations that a financial advisor makes. Like you might predict, an advisor who makes commissions on the sales of their product might be tempted to recommend more than you actually need. In the same way, an advisor who charges a retainer fee based on your assets might not put much time and attention into your needs if you don’t have much money.
Although there’s no method that completely eliminates conflicts of interest, you can take steps to reduce them. Regardless of what type of financial advisor you need, always ask about fees! A good advisor will take the time to explain their fees before you hire them. If they try to avoid the question, it’s a clear sign that you should avoid working with them.
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