Broker Check

How you should pay your financial advisor.

Do you know how your investment advisor is paid?  You should.  The way your advisor is compensated determines their motivation.  Your agreement with them may create a conflict of interest.  With the right choice, you could align your motivations and theirs.  The most common forms of compensation agreements are commissions, fees, hourly, and flat.  

Commissions are the way most advisors were paid 10 years ago.  The client pays for completing a transaction.  Several of the largest mutual funds charge 5.75% as an upfront fee with a 0.25% annual fee each year thereafter.  A $10,000 purchase would pay the advisor $575 and $25 a year from then on.  This incentivizes the advisor to focus his attention on making purchases.  It also encourages them to choose funds with a higher sales charge.  This could be a good choice for a buy and hold investor like a Grandparent buying investments for their grandkids that they will hold for years regardless of performance may be wise to choose this option.

Fees as a percent of assets are the fastest growing option for clients and advisors.  The advisor is paid a percentage of the assets being managed each year.  This incentivizes the advisor to grow the account value because it is the only way for them to be paid more on the account.  It also encourages them to keep the investor happy through a positive customer service experience to continue to get paid.  Fees vary depending on the advisor, type of investments and size of the account.  A 1% fee on a $10,000 account is $100 per year.  This fee works well for investors that are looking for ongoing advice and guidance.

Flat fees are often paid for specific tasks.  A client may pay $5000 for a financial plan or to value a small business.  These fees are sometimes used to pay a flat fee to an advisor for investment management but the advisor would be incentivized to spend less time on each client to increase their bottom line.  

Hourly fees are meant to help keep advice neutral since the advisor is being paid for the time he spends on the task.  This type of fee is appropriate for consulting on projects or when a business pays to consult their employees on personal finance.

Some advisors are only able to accept payment in certain ways.  Independent Registered Investment Advisors often have the most flexibility.  Sometimes they mix and match different options to get you the best result.

When you hire an advisor, be sure you know how they are being paid and match it to incentivize them to do the best thing for you.