Financial Advisors, like all service professionals, charge for their services. Similar to attorneys, CPA’s, Doctors, Engineers and others, how much they charge can vary by whatever factors each professional deem important. The type of firm they work for, years of experience, specialty, competitive landscape and geographic region can factor into the equation.
However, quite unlike most other professions, the financial advisor industry has many ways it can charge for its services. This can be very confusing because most professions have one, perhaps two modes of charging, typically by the hour or project, the financial advisor landscape has six different methods of charging.
We will review the methods in order of how common they are, based on the numbers of investors that pay their advisor in this manner.
Historically, this was the only way to pay for a financial advisor. If your advisor suggested a stock, bond, or option, once the investment was made, he got paid a commission based on the transaction rates of that brokerage firm which are based on a formula that includes the number of shares and total dollar value of the transaction, from under a hundred dollars to many hundreds depending on the size of the transaction. The advisor has to be employed by a firm that is registered with FINRA, the brokerage regulator. The advisor only got paid when there was a transaction. This method of paying an advisor is fast shrinking, especially since many discount brokers have come out with free trading, although most investors still pay their advisor this way. Semi-Self Directed investors find this method appealing because they only pay when they transact.
Assets Under Management
Over the last 30 years, this method has been growing the fastest as more and more advisors are converting to this method when they leave the brokerage world. The advisor charges a percent of the assets they are managing, usually about 1%. For a $100,000 account the annual fee is $1,000. The advisor is usually employed by a Registered Investment Adviser and usually makes purchase and sales for you without getting permission prior, called investment discretion. Some advisors also include financial planning services for this fee, but many do not. For someone with an investment portfolio and want a professional to manage it, this model works well.
There are many thousands of advisors that charge by the hour for all manner of financial advice, but most that do charge by the hour do so for financial planning services. The rate ranges are quite wide from $75 per hour to $500. The level of complexity of an investor’s situation will drive what advisor to choose, and costs to expect.
For a fixed annual fee, these advisors will handle your financial matters be it asset management, financial planning or both. Historically, annual retainer advisors catered to the wealthy although the financial advice industry is undergoing rapid change and advisors are beginning to offer this method to clients with more moderate assets and incomes.
This model is just like the annual retainer in all respects, but paid on a month-to-month basis, with most of these advisors allowing cancellation at any time. The majority of these advisors and their clients are younger investors just starting and tend to consume financial planning guidance and less asset management services.
Sometimes an investor has one specific issue they are concerned with or a singular task they want addressed. Thankfully, many advisors can be hired on a one-time basis to work on that task. For example, this investor had too many retirement accounts and wanted them consolidated. For a singular fee, the advisor handled the burdensome project.
There are many ways an investor can pay for financial advice and one method is not better or worse than the other in the absolute sense, rather your situation, need, and comfort level will dictate which model is best for you.
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