Ways to Compensate a Financial Advisor
You know you want a financial advisor. You love the idea of having someone on your side, helping you make financial decisions, but how do you compensate a financial advisor?
Believe it or not, the way you pay your advisor may determine how well they help you with your finances. It sounds crazy, but certain payment models compensate financial advisors more for certain investments and/or financial products. In that case, your financial advisor may not have your best interests at heart. Instead, he or she has their paycheck in mind; we don’t recommend this method.
Look for an advisor whose fee isn’t determined by how well your investments do or which products you purchase. You want a fiduciary advisor or one that works based on your best financial interests. So how do you compensate a financial advisor with this payment structure?
Hire an Advisor Hourly
If you have a one-time request for financial assistance, you may pay an advisor hourly. Be careful, though, as this method can get expensive. Think about the complexity of what you need. Will it take many hours? Ask the advisor his thoughts on the timeline before choosing an hourly pay structure.
Pay an Annual Assets Under Management Fee
When you hire a financial advisor to manage your assets and/or make financial decisions for you, they often charge an annual assets under management fee or a percentage of your assets that they manage. The more assets you have, the higher the fees you pay, but this puts the advisor in a fiduciary responsibility position, so he or she must act in your best interest.
In the AUM structure, financial advisors not only help you set up your financial plan, but they help you maintain it too. Your advisor should provide advice, help you change plans when situations change, and even change directions if you change your goals.
The average advisor charges 0.5% to 1.5%. The fee varies based on the services offered, such as tax-loss harvesting, trading, and/or rebalancing your portfolio.
Commission-based financial advisors focus mostly on active trading. They buy and sell assets for you regularly, earning a commission on the trades they make. Because advisors get paid by the companies whose investments they trade for you, this often leads to more biased trading and is one of the least desired ways to compensate a financial advisor.
When you choose a financial advisor, choose him or her based on their experience and expertise, but also on how you pay him or her. You want an advisor that works as a fiduciary so that your best interests are protected.
No matter how you pay your advisor, though, always make sure you’re comfortable with his or her strategies. Find out how he or she operates, how your investment beliefs align, and how well you work together. Just like any other service, you should interview potential advisors to make sure they’re a good fit for you, ensuring your peace of mind with your financial investments.
Disclosure: This article is not to be taken as investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal, insurance, or financial professional. The observations made in external articles are independent of Wimple and should not be read as financial recommendations.