Understanding the True Cost of a Financial Advisor

This article answers the following questions:

• How are financial advisors paid?
• What makes fiduciary wealth management a must-do?
• Are all financial advisors looking out for your best interests? Why is it important to learn how your advisor is compensated?
• Which advisor compensation models might create some conflicts of interest?
• Is a flat-fee financial advisor your affordable option?

If you are a busy professional, entrepreneur, or have recently retired from a successful career, you more than likely have been working with a financial advisor at some point in time over the years. You need someone to help guide you through the complicated tax and investment requirements that come with affluence over the long term. 

However, there are different types of advisors out there: some are fee-only, some are commission-based, and others charge on an hourly basis. Selecting your optimal choice can be as challenging as it is essential. Let’s consider why one type stands out.

Independent Wealth Solutions: Follow the Money

Skilled professionals like wealth management advisors are invaluable. Being able to access their experience, advice, and guidance can help you make more sound decisions with regard to your legacy. However, they do not work for free.

In fact, when your goal in hiring a financial advisor is to maximize and optimize your wealth, the fees you pay to retain one can significantly impact your assets over time. Compensating your advisor should never become counterproductive.

Nevertheless, for inattentive investors, it has the potential to. That is why what follows are the various ways financial advisors are compensated—and our notes on how that can impact the growth of your investments over time.

Commission-Only

In the commission-only model, an advisor is paid a commission based on the sale of an investment product. While this may be the right course of action for your specific needs at a point in time, you want to make sure that there are few, if any conflicts of interest when you are selecting a suggested investment. Understanding what commission will the advisor make, is it a proprietary product (developed in-house), etc. You want to understand if this product is suitable for your situation. 

The potential conflict of interest is fundamental to this model. If they are fiduciaries, they are legally obligated to disclose any possible commission(s), and/or conflicts of interest, beforehand. An example of a conflict of interest might be suggesting a proprietary mutual fund that has a much higher commission and lower performance than a third-party fund. 

Fee-Only

Fee-only financial planners are compensated by the hour, by the project, or by a retainer for ongoing service. They accept no commissions or other forms of revenue-sharing. As a result, their compensation does not depend on whether they can sell a certain product. 

This eliminates the built-in potential conflict of interest when they recommend products to clients: Receiving no commission from sales, they focus exclusively on suggesting assets which might improve your portfolio. If they are fiduciaries, they have voluntarily become legally obligated to do so.

Fee-Based

The designation for these advisors can be confusing: As it implies, they are often paid primarily through a fee. Meanwhile, they often accept commissions, as well. So, their compensation model might best be described as a fee-commission hybrid. 

Hourly Fees

As you might expect, the hourly-fee model involves a flat amount paid to an advisor based on the number of hours they spend with you. This rate is normally determined by the advisor and does not fluctuate based on the size of assets under management.

Hourly advisors can also charge clients for other services like investment research, asset allocation, or financial planning.

Learn How ViaWealth Can Help You Pursue Your Retirement Goals 

Asset-Based Retainer Fees

An asset-based retainer fee is a type of financial investment fee that is charged by an advisor on a quarterly basis. Typically, the amount you pay in fees will be based on a percentage of your total assets under management (AUM). 

The fee is based on the amount of money the advisor is managing for you. For instance, if your portfolio is $500,000 and the advisor charges you 1%, your annual fee would be $5,000, spread over the year, which would be $1250 a quarter.

Most advisors, including ViaWealth, use an asset-based retainer fee structure to charge for their services. This is based on the value of assets to be managed. There is typically a sliding scale of fees based on the amount of assets the advisor is managing for you. As your net worth grows (or shrinks), the fee structure remains in place over time. 

Hidden Fees?

Your advisor should also share with you the cost of custodian services as well as the fees paid to the money managers who are actually investing your money. These are additional fees that you should be aware of as they can impact the overall productivity and profitability of your holdings over time. 

In addition to how they are paid, it is also important to understand an advisor’s financial industry background and experience. The best way to do this is by asking things like:

• How many years of experience do you have as a financial advisor?
• What certifications or designations do you have?
• How are you compensated? 
• What is your investment philosophy? 
• Do we have the same goals in mind?

Your Net Growth

Once you have a good understanding of how your advisor is compensated, you will have a better understanding of what you should expect from your financial advisory team. 

At ViaWealth, our entire research-based process is built on transparency and openness from the moment you walk in. By choosing to work with a fiduciary advisor, you can rest assured that we have your best interests at heart. Contact us and see. 

Disclosure:

ViaWealth, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.