How do you pay your financial advisor or financial planner?
There are a few different ways an advisor earns fees for compensation and it’s important to have an understanding of the different fee models so you can make an informed choice when choosing a financial advisor. You can work with an advisor on an hourly basis, project basis, subscription or flat fee, Assets Under Management (AUM), or commission.
Hourly Financial Planning or Hourly Financial Advice – This is a great option to consider, however not as many advisors offer this. It can be an affordable option for people since you only have to pay for the time that is directly working with you or for your finances. This means you are not paying for time and service that you don’t use like you might in some other compensation models. It can be an amazing way to get advice or even to get a financial plan built for you. Ultimately you are paying the same for the advice no matter how many assets you have or how much you make. Keep in mind that if you have more questions or a more complicated situation, it will result in more billable hours.
Cons-The relationship is a little more transactional. Some people may want that. You can get an answer to a specific question or a one-time financial plan that you can implement and follow through on yourself. But others want an ongoing relationship with someone they can call no matter what and someone who is always there in their corner. This can be accomplished hourly but some of the other payment models could be a better match for that need.
Project-based- This one is pretty straightforward; you hire an advisor to accomplish a specific task. Maybe that is a singular topic like providing advice on stock options or maybe it’s to create a comprehensive financial plan. These projects are generally priced based on complexity. A comprehensive plan might cost $1500 up to $10,000. Maybe more, maybe less, or somewhere in between. This works great if you want a specific task done and you want to lock in what the cost will be rather than seeing an hourly bill at the end.
Cons-similar to hourly cons
Flat fee or Subscription- Some advisors and planners offer a monthly/quarterly/annual flat fee or subscription service where you pay ongoing for financial planning and investment advice. Paying for financial planning as a subscription service out of your cash flow can be a huge benefit if you don’t have many assets saved. You will be able to get full comprehensive advice on an ongoing basis because you are paying for it independent of any assets you may have for the advisor to manage. However, sometimes the flat fee does include investment management. This structure combines some of the same pros from hourly and project-based but has the added benefit of creating a deeper, long term relationship. That is something that many advisors and clients are looking for.
Cons-In some cases this could be a more expensive option than other fee models and it does reduce the available cash flow that you could use for additional investing.
Assets Under Management or AUM –This is where an advisor will charge you a percentage of whatever assets they are managing for you. For example, if the advisor is charging you a 1% AUM fee and they are managing $250,000 worth of investments in your accounts for you, then you just multiply them together to find out how many actual dollars are being billed directly from your account. In this case, it would be $2,500 for the year ($250,000). Keep in mind that the dollar amount can go up and down depending on the value of your accounts.
AUM is still the most common because it is a simple way for advisors to charge for managing your investments, and often the advisor will include additional financial advice about other topics or comprehensive financial planning. It’s most common because it’s easy to understand, transparent, and does not cause clients to pay out of pocket for services. Since you are not paying for service out of your free cash flow it is also set up to be the most viable long-term. If you want the same advisor in your corner for a long time to help you through the various stages of life, the AUM fee structure might be a good match for you.
Cons-It can be more expensive than paying for services another way. Some advisors will limit who they work with to people that have larger investment accounts since they are only able to generate revenue from the accounts they manage.
Commission-Paying by commission has become a lot less popular over the years, even though that was the original way that stock brokers and other financial professionals helped people invest their money. When you invest with a commission, some of every dollar you put in goes to commission and the rest goes to your investment. So, if there is a 5% commission on your mutual fund and you invest $10,000 then $500 goes to the commission and the other $9,500 will be invested. Depending on how much you are investing, what the commission rate is, and how often your advisor wants you to change your investments, the fees could be more or less than some of the other fee models previously mentioned.
In addition to earning commissions on mutual funds, some advisors also earn a commission if they sell a life insurance policy or an annuity. Earning a commission for a sale is not inherently wrong, but it does create a conflict of interest. As a consumer, you need to be aware when an advisor recommends a life insurance policy or an annuity that the advisor will likely earn a commission. So, you need to make sure you fully understand the product and why the advisor thinks it is in your best interest to put your money there vs something else.
There are very knowledgeable and trustworthy advisors that use all these different models. You should always clearly understand how you are paying for the service you are getting and how that could create a conflict of interest. Foundation Wealth Planning is a fee-only firm that does not accept commissions. We do this to remove a potential conflict of interest and try to offer an unbiased view as much as we can. If you have additional questions about this article or questions related to your financial situation, please reach out.
Phil Francois, CFP
phil@foundationwealthplanning.com
https://www.foundationwealthplanning.com/