What Is an Advisor Fee?
An advisor fee is a fee paid for professional advisory services on matters related to money, finances, and investments. It can be charged as a percentage of total assets or it may be associated with a broker-dealer transaction in the form of a commission.
- Advisor fees are paid to financial professionals for providing financial services, which can cover a broad range of activities from advice and planning to placing trades in the market.
- Transaction-based fee structures involve paying commissions or 'loads' to purchase products or trade in the market.
- Asset-based fees are based on a straightforward percentage charge of assets under management (AUM), typically 1% or more per year.
- Fee-based advisors charge a flat fee or hourly rate that involve neither commissions nor asset-based fees.
Understanding Advisor Fees
Advisor fees can be charged for a range of personal financial advisory services. Often advisor fees are a key factor for making directed investments in professionally managed portfolios. Investors can also incur advisor fees when seeking the support of full-service broker-dealers in executing transactions. Generally advisor fees will be either asset-based or commission-based.
Some financial advisors are moving to a transparent flat fee structure that does not involve any sales commissions, finders fees, or percentage of AUM.
Financial technology innovation has increased the number of personal advisory wealth management options for investors. Robo advisors now compete with wrap accounts for wealth management business. Investors seeking personal portfolio management advice can also turn to traditional financial advisors. Overall, the financial advisory industry is growing more competitive, which has affected fees.
All of these platforms will charge investors an asset-based fee for their financial advisory services. Fees at robo advisors and wrap accounts will typically be lower as these services provide less personal attention and advice than a personal financial advisor.
Personal financial advisors have a fiduciary responsibility to manage client assets in the best interests of their clients. This means they must go above and beyond to ensure that an investment not only fits an investor but that it is also a good investment for their objectives. These personal financial advisors will charge some of the industry’s highest asset-based fees, typically averaging approximately 1%-1.25% per year of assets under management (AUM).
Personal financial advisors offer a broad range of services and provide a basis for comparison to robo advisors and wrap accounts. Both robo advisor and wrap account asset-based fees will usually be considerably lower. At robo advisor Betterment, investors will pay a standard annual fee of 0.25%, or 0.40% for premium services. The Schwab mutual fund wrap account charges slightly higher than that at 0.90% for the first $100,000. Investors should watch out for transactional fees, which may or may not be included in asset-based fee quotes.
Commissions, or transaction-based fees are the second type of advisor fee investors will encounter. These fees are associated with full-service broker-dealer transactions. Commission-based broker-dealers have a regulatory obligation to ensure investments meet suitability standards. Both individual securities and managed funds will require a commission-based fee. Individual securities trading typically involves a flat fee per transaction, while managed fund fees are dictated by the fund company.
Sales loads can be considered an advisor fee since they are incurred through advice and interaction with a full-service broker-dealer. Open-end mutual funds will charge a sales load that is structured by the mutual fund company and agreed upon by the intermediary. These fees are separate from the management fees and expense of a fund.
Sales loads are outlined in a mutual fund prospectus. They may include front-end, back-end or level-load fees. A-shares typically have front-end loads. B-shares will often have contingent deferred back-end loads that expire over time. C-shares are usually associated with level-load fees that are paid annually throughout the duration of the holding period. Front-end loads are typically the highest fee for investors, ranging from 4% to 5%. Back-end and level-loads are generally lower, ranging from approximately 1% to 2%. Breakpoints may also be a sales load factor for investors with high investments or share accumulation. (See also: The ABCs of Mutual Fund Classes.)
For more on advisor fees see: How to Cut Financial Advisor Expenses and Paying Your Investment Advisor - Fees Or Commissions?