When shopping for a financial planner, it's natural to ask: “How much do you charge?” If you're expecting a simple one-sentence answer, think again.
There are many ways that consultants get paid and it can get complicated. Their fee structure reflects the type of practice they want to run and the business model that enhances their brand.
One of the best ways to vet an advisor is to ask how they arrived at the fee structure and why they chose it. What motivates them to charge the way they do?
“Every advisor likes to argue about which way to go [of getting paid] “What's better and what's worse?” said Chris Cebulski, a certified financial planner in Austin, Texas.
Many advisors base their salaries on a percentage of assets under management (AUM). The percentage, traditionally 1%, often varies based on the size of the client's investable assets.
Other popular options include charging an hourly fee or a flat fee per project (perhaps to formulate a custom financial plan). In recent years, some advisors have adopted subscription pricing that offers levels of ongoing service with varying monthly or annual naturalization fees.
If you want to hire an advisor for both financial planning and investment management, you may encounter a mixed fee structure. This means you will pay a percentage of assets under management for portfolio management plus a flat or hourly rate for financial planning (which can include assistance with family budgeting, retirement planning, estate or tax planning, etc.).
More advisors are preferring this hybrid approach because it stabilizes their income when markets fall and clients' investable assets shrink. It also gives them the flexibility to serve a wider range of customers.
For example, many early and mid-career professionals lack significant investments to manage or have their assets tied up in a tax-advantaged retirement account such as a 401(k). But they may be willing to pay an advisor a flat fee in exchange for advice and targeted financial planning.
There are also advisors who earn commissions when they buy and sell certain financial products (such as pensions or mutual funds) or insurance policies on behalf of a client. “Fee-only” refers to advisors who do not charge commissions and make all of their income from fees.
The advisor's fee structure is revealing. Those who favor financial planning over portfolio management tend to charge a flat fee or a per-project fee that reflects the relative complexity of the client's needs.
“You can tell how they think about the value of their services by being clear and logical in how they present their fees,” said Sarah Grillo, a marketing consultant in New York City. “If they say they focus on financial planning, yet they charge fees for assets under management, you should be skeptical of any claims that planning is robust.”
In fact, this may indicate that the advisor wants to oversee as much of your assets as possible. The more assets you transfer to the advisor's firm, the higher the advisor's AUM fees will be.
“Their main interest may be growing your assets and making sure those assets stay with them,” Grillo said. “I advocate flat fees because they promote greater clarity and transparency.”
Advisors who work for larger financial services firms are more likely to charge fees for assets under management or collect commissions for selling certain products. This isn't necessarily a red flag: You can benefit if you want active investment management and the company boasts top asset managers, proprietary research, or access to alternative investments that can diversify your investment portfolio.
“If advisors charge an hourly rate or use a flat-fee model, they are likely to be a smaller firm or a sole practitioner,” said DJ Hunt, a certified financial planner in Melbourne, Florida. A set of eyes on everything.”
Know what you want
As long as you don't need investment management — either because you're a do-it-yourself investor or you don't have a lot of investable assets — paying fees only for financial planning expertise may make sense.
It's easier to evaluate an advisor's rates if you know what you need from the beginning. Asking a wealth manager to take your $300,000 or $1 million portfolio and make investment decisions that produce reasonable returns and reflect your ability to tolerate risk is one thing. But if you're more intent on knowing whether to rent or buy a home, how to save for a child's tuition, or how to figure out if you can afford retirement, you're better off paying the fees of a skilled, certified financial planner. .
“Assessing your needs can be difficult,” Hunt said. “When you first meet with a counselor, you may think you only need help in one area. This can lead to a broader discussion of other interrelated needs. Then you say, ‘I didn’t think of that’ and realize that this is just the tip of the iceberg as your needs expand.”
more: Saving too little? Spending too much? How to know if your financial fears are rational (or not).
Read also: How artificial intelligence will change the ways financial advisors manage your money
