When shopping for a financial planner, it\u2019s natural to ask, \u201cHow much do you charge?\u201d If you expect a simple, one-sentence answer, think again.<\/p>\n
There are many ways that advisers get paid and it can get complicated. Their fee structure reflects the type of practice they want to run and the business model that reinforces their brand.<\/p>\n
One of the best ways to vet an adviser is to ask how they arrived at their fee structure and why they chose it. What motivates them to charge the way they do?<\/p>\n
\u201cEvery adviser loves to argue about which way [of getting paid] is the best and which is the worst,\u201d said Chris Cybulsky, a certified financial planner in Austin, Texas.<\/p>\n
Many advisers base their pay on a percentage of assets under management (AUM). The percentage, traditionally 1%, often varies based on the amount of a client\u2019s investable assets.<\/p>\n
Other popular options include charging an hourly fee or flat per-project fee (perhaps to craft a customized financial plan). In recent years, some advisers have adopted subscription pricing that offers tiers of ongoing service with different monthly or annual retainer fees.<\/p>\n
If you want to hire an adviser for both financial planning and investment management, you might encounter a hybrid fee structure. That means you\u2019ll pay a percentage of AUM for portfolio management plus a flat or hourly rate for financial planning (which could include help with household budgeting, retirement planning, estate or tax planning, etc.).<\/p>\n
More advisers are favoring this hybrid approach because it stabilizes their income when markets plummet and clients\u2019 investable assets shrink. It also gives them flexibility to serve a broader range of clients.<\/p>\n
For instance, many early and mid-career professionals lack significant investments to manage or their assets are tied up in a tax-advantaged retirement account like a 401(k). But they may be willing to pay an adviser a flat fee for targeted financial advice and planning.<\/p>\n
There are also advisers who earn commissions when they buy and sell certain financial products (such as annuities or mutual funds) or insurance policies on the client\u2019s behalf. \u201cFee-only\u201d refers to advisers who do not charge commissions and generate all their income from fees.<\/p>\n
An adviser\u2019s fee structure is revealing in itself. Those who prefer financial planning to portfolio management tend to charge flat or per-project fees that reflect the relative complexity of the client\u2019s needs.<\/p>\n
\u201cYou can tell how they think about the value of their service offering from the clarity and logic of how they present their fees,\u201d said Sara Grillo, a New York City-based marketing consultant.\u00a0\u201cIf they say they\u2019re focused on financial planning, yet they are charging a fee on assets under management, you should be skeptical of any claims that the planning is robust.\u201d<\/p>\n
Indeed, it may indicate that the adviser wants to oversee as much of your assets as possible. The more assets you transfer to the adviser\u2019s firm, the higher the adviser\u2019s AUM fee.<\/p>\n
\u201cTheir main concern might be to grow your assets and make sure those assets stay with them,\u201d Grillo said. \u201cI\u2019m an advocate for flat fees because they promote more clarity and transparency.\u201d<\/p>\n
Advisers who work for big financial services companies are more apt to charge for AUM or collect commissions for selling specific products. That\u2019s not necessarily a red flag: You can benefit if you want active investment management and the firm boasts top asset managers, proprietary research or access to alternative investments that can diversify your portfolio.<\/p>\n
\u201cIf advisers charge an hourly rate or use a flat-fee model, they\u2019re probably a smaller firm or sole practitioner,\u201d said DJ Hunt, a\u00a0certified financial planner in Melbourne, Fla. \u201cSo you may not get staff, just one set of eyes on everything.\u201d<\/p>\n
Know what you want<\/h2>\n
As long as you don\u2019t need investment management \u2014 either because you\u2019re a do-it-yourself investor or you don\u2019t have much investable assets \u2014 then paying fees solely for financial planning expertise can make sense.<\/p>\n
It\u2019s easier to evaluate an adviser\u2019s pricing if you know what you need from the outset. Asking a wealth manager to take your $300,000 or $1 million portfolio and make investment decisions that produce reasonable returns and reflect your risk tolerance is one thing. But if you\u2019re more intent on learning whether to rent or buy a home, how to save for a child\u2019s tuition or how to tell if you can afford to retire, you\u2019re better off paying a fee for a skilled, credentialed financial planner.<\/p>\n
\u201cAssessing your needs can get tricky,\u201d Hunt said. \u201cWhen you first meet with an adviser, you may think you need help in just one area. That can lead to a broader discussion of other interrelated needs. Then you say, \u2018I hadn\u2019t thought of that\u2019 and you realize it\u2019s just the tip of the iceberg as your needs expand.\u201d<\/p>\n
More:<\/strong> \u00a0Saving too little? Spending too much? How to know if your money worries are rational (or not).<\/a><\/p>\n Also read:<\/strong> How AI will change the ways financial advisers manage your money<\/a><\/p>\n<\/p><\/div>\n<\/div>\n