Financial advisor fees can be confusing. Different financial advisors have various ways of charging for their services, including:
- Commissions
- Flat or Hourly Fees
- Assets Under Management (AUM)
- Fee Based (Combination of fees and commissions)
All of these payment methods are used by legitimate and reputable retirement financial planners.
And, each payment method has advantages and disadvantages for you. What is important is that you clearly understand your financial planner’s compensation structure and the pros and cons inherent in that method.
Commission Based Financial Advisor Fees
Commission-based advisors earn their money by selling stocks, bonds, mutual funds, life insurance, annuities and other investments. Most retirement financial planners working under this model are ethical and will try to keep your best interests in mind – but they may be prejudiced by higher commissions on one product or another and lean toward selling you products that may not be in your best interest.
In a commission only setting, you risk that the advisor is selling you something that is good for them and not exactly the best for you. However, the advantage of using a commission based advisor is that the advice is free — and usually in your best interest.
Always ask your financial advisor if they are being compensated with commissions and how they justify one financial product over another.
Fee Only Financial Planner
A fee only financial planner is compensated entirely by fees.
The fees might come in the form of flat fees or an hourly rate.
- Flat Fees: If the advisor is compensated with a flat fee, then you pay a predetermined amount for a specific deliverable. Rates vary tremendously. A basic overall retirement plan might cost $1000 – $2500. Advice on how to allocate your 401k might be $500-$2,500.
- Hourly: If the advisor is charging an hourly rate, then you are paying for the exact amount of time they spend helping you. A Certified Financial Planner may charge a median fee of about $100 – $250 per hour.
Many people prefer a fee based financial advisor, since there is little opportunity for a conflict of interest. The advisor is not earning a commission from the products they sell you – so you can be sure that they are recommending the products and services that best meet your goals and risk tolerance.
Another advantage of using a fee only planner is that you are usually paying for a clear set of well defined deliverables.
Assets Under Management
Assets under management (AUM) is also sometimes referred to as Funds Under Management (FUM). These financial advising fees are based on a percentage of the value of the client’s assets which a financial institution is managing.
This fee structure is typically used when you are hiring a financial advisor to actively manage your money on an ongoing basis. (Sometimes the advisor will also provide some general financial planning guidance. Clarify with the advisor whether or not they will do this for you.)
The advantage of paying your advisor a fee based on the amount of money they are managing for you is that they have the proper incentives to grow your wealth. Afterall, the more the financial advisor grows your assets, the more they are paid. They also would not want you to lose any money.
Depending on the amount of money you have, advisors typically will charge you a fee representing 1-2% of your assets each year.
Fee Based: Charges Fees as Well as Earns a Commission
There is a significant distinction between a fee based financial planner and a fee only financial planner.
A fee based financial planner charges flat or hourly fees or a fee based on AUM AND they earn a commission for the financial products you buy.
Retainer Fees
Some financial advisor fees are charged in the form of a retainer. A retainer fee is an upfront cost for a service. This is becoming an alternative to AUM.
The advantage is that you know how much you will be paying for a specific service.
What is the Best Kind of Financial Advisor Fee?
Each type of financial advisor fee has advantages and disadvantages.
Whichever type of fee structure your financial advisor uses, you should be sure to understand all of their incentives. It is important to ask your financial advisor if they might have any conflicts of interest and find out if they earn bonuses or other awards in return for recommendations.
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