Financial Advisor Fees
According to a recent article on Yahoo Finance, more than one in five investors don’t know what they pay in investment fees, according to a survey by Personal Capital. Another 10 percent don’t even know if they’re paying any fees at all.
Financial advisors are getting paid for the advice they provide. Generally speaking, 1 percent per year is a reasonable fee to pay for financial guidance, according to reports. This should include financial advisor fees plus any fees on the investments you use.
According to the Personal Capital survey, a 1 percent higher fee can cost an investor nearly $250,000 over a lifetime.
How do financial advisors earn their living? Are financial advisor fees worth the cost?
There are three ways financial advisors get paid:
- Fee-based – financial advisors charge an annual, hourly or flat fee.
- Commission-based – financial advisors are paid according to the investments they sell.
- Combination of fees plus commissions. Some advisors who are fee-based are also earning commissions.
Fee-only Financial Advisors
The most common fee-only financial advisor structure is to charge a percentage of the assets under management (AUM). In this case, the advisor deducts her fee from your account, usually on a quarterly or monthly basis, based on your account balance. If you have $100,000 with an advisor charging 1 percent of AUM, you’d pay $1,000 per year in fees.
The average AUM fee for a human financial advisor is 1 percent, but they sometimes charge on a sliding scale. Robo advisors also use the AUM fee structure. Most robo advisors charge between 0.25 and 0.5 percent per year, according to Yahoo Finance.
If the financial advisor’s fee grows with your account balance, it’s clearly in his best interest to help you make money. This is why the DOL created the fiduciary rule to try to force all retirement advisors to use a fiduciary’s fee-only structure, since Fiduciary advisors must be fee-only.
Since flat fee advisors have no affiliation with the investments you use, they’re often seen as the most unbiased financial advisors, according to the article.
You can see how much your fee-only investment advisor costs on the firm’s Form ADV, filed with the SEC. These forms are available online or you can request a copy from your advisor.
Commission-based Financial Advisors
Commission-based advisors are paid according to the investments you choose. They’ll receive a percentage of your investment dollars from the sponsor of the investment.
There are several types of investments that carry high commissions that investors may not be aware of. Annuities, mutual funds, and alternative investments such as non-traded REITs and oil and gas LPs can all carry high commissions and fees.
Mutual funds can carry sales loads between 3 to 6 percent while non-traded REITs and other Regulation D private placement investments often have high fees that can range from 7-10%, as well as additional “due diligence fees” that can range from 1-3%.
Investors often don’t realize the heavy commissions they are paying because they can’t see them coming out of their account balance on each statement.
These incentives may cause less scrupulous advisors to push investments with higher commissions. It’s obviously in the advisor’s best interest to recommend the highest-paying product, which may not be the best product for the investor.
Fee-based Financial Advisors
The most common compensation structure is the Fee–based financial advisor. Some advisors who are fee-based are also earning commissions.
Fee-only advisors do not collect commissions whereas fee-based advisors do. Often a fee-based advisor will charge an AUM fee while also earning a commission on the investments sold.
How Much Does a Financial Advisor Cost?
Unfortunately, it is not always easy to tell what your financial advisor actually costs without asking the right questions. Even fiduciary advisors, who are required to disclose all fees and conflicts of interest, can do so in fine print.
According to Yahoo finance, these are questions to ask a financial advisor about compensation:
— How are you getting paid?
— Do you earn commissions?
— How much money are you and/or the company making to put me in this investment?
— What are my total costs for working with you?
You could also ask for a sample statement with the client’s personal information removed. Have the advisor explain any fees on the statement.
Free Consultation with a Securities Attorney
According to Yahoo Finance, “the biggest question when evaluating a financial advisor is if they’re giving you greater confidence and clarity that you’ll meet your financial goals.” Ask the advisor to specifically explain their value for you. The advisor should be able to list all the things that will be done on your behalf to earn the fee. Then you can decide if a financial advisor is worth the cost.
This information is all publicly available and provided to you by The White Law Group.
If you have concerns regarding your investments, the securities attorneys at The White Law Group may be able to help you. Please call for a free, no-risk, consultation at 888-637-5510.
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Franklin, Tennessee.
For more information on The White Law Group and its representation of investors in FINRA arbitration claims, visit https://www.whitesecuritieslaw.com.