There’s no such thing as a free lunch (or free steak dinner, as the case may be). And, for good financial advice, you’ll have to pay appropriately. Still, many people are paying too much for the quality of services they receive. Are you one of them?
Financial advisors charge fees in several different ways, and understanding them just might help you answer the Million-Dollar Question: Is your retirement advisor charging too much?
Commissions
Like car salesmen, many financial advisors work on commissions. The more expensive products they sell, the more money they stand to make. This could cloud some peoples’ judgments, don’t you think?
Fees and Commissions
This is what we call a “fee-based” advisor. You pay a fee, and they get commissions on what they sell. See above for why that might present a problem.
A Percent of Assets Under Management
Depending on your account value, this could prove to be a very expensive payment option. For example, let’s say your retirement funds hit the two-million dollar mark, and your financial advisor charges a slim-looking 1.5%. That comes out to $30,000 a year. You have to ask yourself whether the service and benefits you receive are worth that price. If your advisor is fee-only, that’s the only number you need to worry about. But, if your advisor is “fee-based,” then you may also need to factor in additional costs, like a 1% management fee on a mutual fund. When you add that 1% to the 1.5%, expecting a 6.5% return on your investments, you’re suddenly giving up 40% of the profits generated by your assets. Ouch.
Retainer
Retainer fees are a good way to ensure that you receive objective advice on an ongoing basis, since they aren’t dependent on the value of your investments. Different advisors offer different services for their retainers, and can be as hands-on, or as hands-off as required.
Hourly Rate
For financial DIY-ers, paying an advisor an hourly rate for the benefit of their hard-earned wisdom can be a great way to go. But, you have to do the heavy-lifting of managing your assets on your own. If you consult with an experienced advisor or specialist, expect to pay an hourly rate that’s about as much as an attorney or accountant would charge.
No matter how your financial advisor charges, be sure to understand exactly what you’re paying, and what you’re getting in return. To learn more, please contact us today!