Financial Advisor Fees & Costs
The most common type of financial advisor fees are:
- % of Assets Under Management Fees – The AUM fee structure is typically the most commonly offered amongst advisors. It encompasses comprehensive financial planning and investment management services. The fee is typically calculated as a percentage of the assets being managed. In addition to providing holistic financial planning for their clients, under this fee structure, the advisor also creates a customized allocation that directly relates to the financial plan. They implement and maintain the portfolio which includes trading, rebalancing, and tax-loss harvesting throughout the year.
- Flat Fees – Flat-fee relationships are financial planning focused. The advisor will not directly manage your investable assets but can provide guidance on your investment strategy. In this type of relationship, the advisor focuses on cash flow, tax strategy, and financial planning to help you achieve your short and long term financial goals. These are typically ongoing relationships so the advisor can update and adjust your financial plan as your life changes.
Should you find a fee-only financial planner?
The fee-only financial advisors include investment advisors and financial planners paid only by you, the client. You know they are there to serve your best interests because no one else is paying them. Additionally, you can rest assured that they’re not pushing particular investment strategies or insurance products onto you in an effort to earn kickbacks.
Some financial planners work in a fee-only capacity and embrace the fiduciary standard, while others might call themselves a financial planner but are actually salespeople in disguise. That’s why all Zoe Network Advisors go through a rigorous due diligence process Only the top 5% of financial advisors and planners are admitted it into the network.
Questions to ask a financial advisor about fees
When conducting your own due dilligence, be sure to ask your advisor the right questions. Here are some specific fee-related questions you should ask any advisor before hiring them:
1. Are you licensed to receive any commission for insurance products?
The answer should be “No”.
2. Do you receive any compensation from any insurance company for recommending any of their products?
The answer should be a flat-out “No”. Sometimes, advisors will get around this answer by saying they only collect insurance “consulting fees” instead of commissions. However, this is essentially the same thing. They are getting paid by someone other than you.
3. Do you receive any compensation from any investment company for recommending any of their products?
This should also be a “No”. Some advisors will say that they do not receive commissions specifically, but they actually still receive backdoor kickbacks that you are paying via 12-1B fees from mutual fund companies. Those additional fees can range from 0.25% to 1%, which can really add up!
4. Do you earn a commission from private funds or other investments?
The answer should be “No”.
5. Are all of your fees itemized in writing?
The answer here should be “Yes”.
6. How many clients per ‘client-facing’ advisor does your practice have?
If the practice has more than 90 clients per advisor, then the advisor does not really have a high-touch, full-service practice. Thus, fees should be well below what full-service advisors charge.
Are advisory fees worth it?
Like any service, advisors can be considered expensive or cheap depending on the value they provide. Paying $3,000 for generic financial advice from a salesperson that manages 300 clients is a waste of money. Having said that, a top Certified Financial Planner that manages no more than 70 clients who charges $6,000 might end up saving you multiples of the cost via behavioral coaching and tax optimization alone. In fact, both Vanguard’s and Morningstar’s research estimate that good advisors generate an additional 1.5% – 3% annual return when compared to clients who invest alone. This means that even after accounting for a 1% annual investment management fee, the financial advice can still have a significant positive impact on a client’s financial future.
Does that mean a higher cost implicitly means a higher value? Not necessarily. There are plenty of advisors who promise a personalized, high touch service but in reality provide generic asset allocation implementation that a robo-advisor can do for a fraction of the cost. That’s why it’s important to do the due diligence up front!
Paying advisory fees should be a small price to pay for behavioral coaching, vigilance, and peace of mind that a great advisor provides each of his or her clients.
The broader benefits of working with a financial advisor are in the comprehensive planning, personalized portfolio construction, behavioral coaching, and day-to-day wealth management services – all of which should be based on your specific goals and risk tolerance. In addition to the advisor’s alpha, the time you will save and stress you will avoid should not be underestimated. Sure, they are tougher to quantify, but they make a huge impact on a client’s personal happiness and fulfilment.
Where to Find Your Financial Advisor’s Fees
Advisors must itemize all financial advisor fees on the Form ADV paperwork filed with the SEC. You will find a brief overview in Section 5 of Part I, and greater detail in Part II. To keep overall costs low, you may consider working with a fee-only financial advisor where there are more transparent fee structures and fewer possible conflicts of interest. Don’t be afraid to ask questions!