The decision about how to pay the person whose guidance can directly impact your financial success is far from cut and dried. In fact, the fees financial advisors charge can be downright confusing.
Some charge an hourly, monthly or annual flat fee for advice, while others are paid as a percentage of the assets managed, or by product-based commission. But do any yield better results than the others?
Not necessarily.
“[It] should be entirely dependent on the needs of the client,” says Jeremy Shipp, managing partner of O’Dell, Winkfield, Roseman and Ships in Richmond, Virginia.
[See: 10 Questions to Ask Before You Hire a Financial Advisor.]
To decide whether a fee- or percentage-based advisor is the best option, first ask yourself these questions:
How much access do you want to your advisor? A commission or percentage fee-based advisor is like having your advisor on retainer, and this can be beneficial for clients who want 24-7 access, says Paul Murray, president of PTM Wealth Management in Chalfont, Pennsylvania.
“Most clients pay me in this manner and they can freely engage me on any issue or topic without being nickel and dimed by hourly fees. In other words, they can call me anytime for any reason,” he says. “Sometimes people go to great lengths to escape paying fees and have no idea they are already paying them.”
Examples Murray cites are 401(k) retirement accounts and mutual funds, which use the percentage-based model and do not include advice.
What is your rate of return (in dollars and in peace of mind) versus fees? Good advisors, no matter their fee structure, don’t just take orders for investment purchases, says Robert Wyche, managing director of Bridgeville, Pennsylvania-based Waldron Private Wealth.
Instead, if your advisor also offers broad, holistic advice not only on stocks and bonds but on estate and tax planning, their fees have much more value, says Larry Miles, principal of AdvicePeriod, a Los Angeles-based investment advisory with a fee-based compensation structure.
[See: 8 Things Not to Hide From Your Investment Professional.]
This is especially pertinent for younger clients who may have smaller portfolios but could benefit greatly from good advice early on, says Ryder Taff, portfolio manager for Ridgeland, Mississippi-based money manager New Perspectives.
How is the advisor paid? “A fee-only advisor is compensated only by fees charged to the client, that is, the person seeking the advice is the person paying for it,” Taff says. “A commission-based advisor is getting paid by a third party, for instance, a brokerage that they work for or a mutual fund company compensating them for pushing their own products.”
The distinction is important when considering whether your best interests are at heart and whether there are conflicts of interest, he says.
On the other hand, some clients prefer to be “on the same side” as their advisor, Murray says, meaning if their portfolio takes a hit, so does the advisor.
How about two advisors? “It’s very appropriate to have a fee-based wealth advisor as well as an advisor that is compensated transactionally … or, if your advisor is properly licensed, it can be the same person,” says Ty J. Young, CEO of Ty J. Young Wealth Management in Atlanta. “It comes down to your needs and objectives. If you’re buying CDs or an insurance product, there is no reason to pay additional fees to a fee-based advisor on those assets. Like everything in life, it is about balance.”
At the end of the day, no matter how you pay, being cost-conscious is the way to go.
[Read: How Will Robo Advisors Impact the Future of Investing?]
“There is no fee structure that will give you a higher return,” Taff says. “Only lowering overall fees will raise your dollar return.”
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How to Pay a Financial Advisor originally appeared on usnews.com
