You wouldn't get your oil changed or your hair cut without knowing the cost, and yet more than 1 in 4 investors don't know what they pay in investment management fees. Another 10% don't even know if they're paying any fees at all.
How are financial advisor fees charged?
There are two ways financial advisors make money:
Commissions: Advisors under this structure are paid through the investments they sell. While at first, it may seem like money is only being paid by the company selling the investment products, the reality is much different. Many times these commissions are funded by high hidden expenses (which you pay). The biggest potential drawback to this type of fee is the conflict of interest this approach potentially creates. Ultimately, since the Wall Street firm is the one paying the advisor, the advisor works for the Wall Street firm, not you. If one financial product is offering a 3% commission and another is offering a 5% commission, a commission-based advisor may be inclined to suggest the product with the highest commission instead of what is best for you. And shockingly, this is completely legal.Commissioned advisors only need to follow the “suitability” standard not the “fiduciary” standard that the next group of advisors must follow.
Fee for Service: Advisors who charge a fee for their services provide advice that is not influenced by product or per-trade commission. These advisors are paid directly by their clients, and therefore their loyalty is to the client, not some Wall Street firm. An added benefit is the clear transparency about what you are paying, as you and the advisor agree to the pricing, and you sign off on it (in the form of a management agreement) before any work is done or fees are charged. There are three main ways to pay these advisors:
Percentage-based: This approach is typically based on a percentage of “assets under management”, or AUM, which is the total amount of money you have given your advisor to invest. In this case, the advisor deducts their fee from your account usually on a quarterly or monthly basis, based on your account balance.
Flat fee: Some advisors offer to handle your finances for one package price. This fee might be paid quarterly or annually. If you need services that extend beyond the scope of your package, you’ll likely have additional fees, probably at an hourly rate.
Hourly fee: With an hourly fee, you simply pay an agreed upon hourly rate for the advisor’s time, including the time you spend directly with the advisor and any time spent working on your account.
While many times, a “fee-for-service” advisor may at first look more expensive since they are clearly outlining their fees, this is many times not the case. The difference is that with commission based advisors the expenses and fees are many times hidden, where with fee based advisors, they are clearly disclosed.
Lastly, fee for service advisors also act in a “fiduciary” capacity with their clients, meaning that the advice they give must be in the client’s best interest, not theirs, and certainly not some Wall Street firms’.
Straight Path Wealth Management is a fee for service, fiduciary advisor. We are transparent about our fee structure, and as fiduciaries, act in the best interest of our clients. Learn more about questions you should ask an advisor here.
Are financial advisors worth the cost?
Given the impact of fees on investment returns, you may wonder if financial advisors are worth the cost. Financial advisors add value in more ways than achieving higher returns. For instance, a financial advisor uses tax minimization strategies to often times vastly reduce your tax bill. Or they may add value by ensuring your portfolio is rebalanced appropriately. But perhaps the biggest benefit of working with a financial advisor is making sure you don't make poor emotional decisions with your money.
If you have any questions or would like to begin the process of hiring a financial advisor, we would love to have that conversation with you! Our goal at Straight Path is to help you invest better, plan better, and live better. To learn more about how we work as financial advisors, visit our website.