Thank you for joining me for Episode 9 of my Money Wisdom Question Series, where I film answers to common financial and retirement investment questions in 2 minutes or less. Today, I’m going to answer the question, “What does it cost to work with a financial advisor?” What does it really cost? There are basically three ways a financial advisor or firm earns their money.
- Charging an Hourly Fee
- Charging a Fee Based on Money Under Management
- Receiving a Commission on a Product Sold
Charging an Hourly Fee:
This is very similar to an accountant or an attorney the way they charge fees. If they work for you for an hour, they’re going to charge you whatever the billing rate is in your area. Maybe $300, $500 for an hour.
Charging a Fee Based on Money Under Management:
The other way is they will manage your money and charge a fee based on money under management. So, if they’re managing a million-dollar portfolio, there’s going to be some kind of a fee based on the size of that portfolio. Typically, a percentage. It might be 1% or so that they’re charging on that portfolio. When you do better, they do better. When you do worse as far as performance, they get a pay cut. It puts you on the same side of the table as the financial advisor as far as performance and incentive. There’s less conflict of interest as far as that goes.
Receiving a Commission on a Product Sold:
The third way is they will receive a commission on a product that they sell. I’ve been in this business for 30 years and back in the old days a financial planner could sell you a mutual fund and they would get paid by the company; you would never write them a check. But it was built into the particular mutual fund or in the case of insurance, an insurance product.
It’s that simple. Three ways. A fee by the hour. A fee based on money management, which is typically a percentage or some type of a commission. Also, some advisors, Johnson Brunetti and other firms, charge you a fee based on the assets under management. But you get many, many other services because of that. Maybe tax planning or estate planning is involved. They might have a team of attorneys or accountants that can help you.
So, a lot of different ways. Basically, you’re going to pay somewhere around 1% or so, give or take a little bit for that relationship. Or I should say, that’s what the financial advisor is getting paid. It’s either going to be very transparent or you’re going to kind of wonder where that fee is, but you know it’s built in.
Thanks for joining me and I hope you found this information helpful!
P.S. If you enjoyed this topic and you want to hear more, you’ll love this podcast episode I recorded where I talk about a similar subject.
P.P.S. Feel free to submit questions here for a chance to have them answered!