When searching for a financial adviser, it is good to know how they are paid. Their compensation can determine which investments they recommend, and whether they are required to work in your best interest or not.
Part 1 of this blog covered providers paid in commissions only. Here are the two other types of financial adviser compensation:
Fees and Commissions Combination
The overwhelming majority of financial advisers are compensated by a combination of fees and commissions. They charge a fee to provide a financial plan or other advisory services, and then receive commissions upon the sale of investments and insurance products that they may recommend in their financial plan or advice.
It’s difficult to assess the value you’ll receive for the price you’d be paying for when commissions are involved, because the adviser won't know what their total compensation will be until you have decided whether or not you are going to purchase the commissionable products being recommended to you.
The $64,000 Question
When commissions are involved, it is hard to know whether the advisor is recommending something because it is absolutely the best option for you, or because it earns them a substantial commission. You may never know for certain. It is critical that you find out the exact amount of the fees you’d be paying and have a good idea of the typical commissions generated by the advisor’s most common recommendations.
At this time, brokers and registered representatives who earn commissions on the sale of investment products are required by law to tell you how they are compensated, however, they are not required to tell you how much they are compensated.
To be able to effectively determine what you're getting for your money, I encourage you to ask the prospective adviser how much they stand to be compensated from your work together. How else can you compare apples to apples when considering more than one adviser?
Other financial advisors charge fees only. The fees can be charged hourly, as a flat fee/project fee, retainer, or percentage of assets under management. This method of compensation is similar to an attorney. An attorney may charge you an hourly rate to consult with you about employment contract you are considering. They may charge a flat fee to prepare estate planning documents such as wills and living trusts. If you're a large company you may hire an attorney on salary so that they are available, i.e. on retainer, to take care of whatever you need whenever you need it.
Financial advisers may also charge in the same fashion. Before the work begins, get a written fee quote, which includes the maximum amount you will be responsible for paying.
Typically, you will a write a check for the financial adviser’s fee when services are rendered. If the adviser is providing ongoing asset management, they may make arrangements to have that fee withdrawn from your investment account on a quarterly basis. You will receive an invoice directly from the adviser that the fee will be debited directly from your investment account.
A fee-only adviser is much more likely to be a fiduciary who must work in the best interests of their clients.
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This content is developed from sources believed to be providing accurate information, and provided by Kelly Financial Planning. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.