Broker Check

Are you paying your advisor to work against you?

February 14, 2014

Do you know how your investment advisor is paid?  You should.  The way your advisor is compensated determines their motivation.  If you are paying them the wrong way you could be creating a conflict of interest.  With the right choice, you could align your motivations and theirs.  They can help you get better service and align your advisor’s interests with your own.

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.  Other funds charge less.  This incentivizes the advisor to focus his attention on making purchases.  It also encourages them to choose funds with a higher sales charge.  A grandparent buying investments for their grandkids that they will hold for years regardless of performance may be wise to choose this option.

Annual fees 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.

Hourly fees are meant to help keep advice neutral since the advisor is being paid for the time he spends on the task.  I charge an hourly fee when a business hires me to consult their employees on personal finance.  Each employee gets an hour to ask me anything they want about their finances and the employer pays me based on the number of employees I meet with.

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.