A frequently discussed topic in personal finance these days is determining a fair price to pay a financial advisor. It's important to be able to determine if the amount you are paying your advisor for their financial expertise is too expensive. Trained salespeople will repeat cliches like: “Price is only an issue in the absence of value.” I’ve heard this one before. But, you actually should be able to decide if the value of the service you are getting is worth the fee.
There are various factors that influence the cost of financial advice:
How a Financial Advisor Is Compensated
There are two ways a financial advisor can get paid. The first is through commissions. Commissions are paid to financial advisors when they sell a product. The company pays the advisor for the business they could raise. Under this transaction, the advisor only needs to make sure the product is suitable for the client’s need. Conflict of interest could occur under this type of advice, because of the minimal responsibility towards the client and because financial companies can lure more business by offering bigger incentives to advisors to sell their products.
The second way a financial advisor can get paid for their service is by charging a fee directly from their clients. Fees can be charged on an hourly basis, as a flat fee or based on a percentage of the assets under management. Under this type of arrangement, the advisor must act under a fiduciary responsibility, which means they must give the advice that is in the best interest of the client. This arrangement is designed to get rid of conflicts of interest. (For related reading, see: Paying Your Investment Advisor—Fees or Commissions?)
Types of Financial Services Offered
Not all advisors are alike. One of the challenges of the financial planning industry is the client's ability to understand what an advisor can offer. A professional with a simple insurance license might call themselves a financial advisor. Other advisors are only helping their clients with their investment positioning while some professionals create comprehensive plans that take all aspects of their clients’ lives into consideration.
Whether or Not an Advisor Is Part of a Team
You might have to pay more fees if the financial planning firm you work with is structured as a team with specialists like investment managers, insurance agents, CPAs, planners and/or estate attorneys. Multi-professional practices are a new trend in the industry. These firms are making it convenient for the client to have all their needs treated under one roof, but this type of service might command a higher cost.
All and all, you should be the one who knows if you are getting substantial value for your service. A 1% fee might be very expensive under one advisor and very cheap under another. You need to be able to value the type of service you need to make you successful and compare advisors apples to apples.
In the end, the perfect advisor for you should be worth their weight in gold. Compare your financial progress net of the fees you are paying to where you would be if you were on your own. That is how you find out if you are paying too much.
(For related reading, see: How to Build Your Financial Foundation.)
Disclosure: MoneyCoach LLC and/or Patrick Traverse offer Investment advisory and financial planning services through Belpointe Asset Management, LLC, 125 Greenwich Avenue, Greenwich, CT 06830 (“Belpointe), an investment adviser registered with the Securities and Exchange Commission (“SEC”). Registration with the SEC should not be construed to imply that the SEC has approved or endorsed qualifications or the services Belpointe Asset Management offers, or that or its personnel possess a particular level of skill, expertise or training. Insurance products are offered through Belpointe Insurance, LLC and Belpointe Specialty Insurance, LLC. MoneyCoach LLC is not affiliated with Belpointe Asset Management, LLC. Additional information about Belpointe Asset Management is available on the SEC’s website at www.adviserinfo.sec.gov