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Ask a friend how much they pay their financial advisor. Often we hear the answer “I really should know this, but I’m not sure.” Why? Our industry has done a great job of making advisor compensation complex, and different types of advisors are paid in various ways.
This article will explain the four different types of financial advisors based on how they’re paid, and will give you some clues if you don’t already know which kind you have:
1. The Broker
Many brokers or “registered representatives” now charge an annual fee based on the market value of your portfolio. But as brokers, they can also sell financial products (like a mutual fund, annuity, or insurance contract) and typically collect a commission based on how much you buy or sell. The commission could be paid up-front at purchase, upon selling the asset, or on a trailing, continuous basis. Brokers are often employed by a broker-dealer, such as Merrill Lynch, Morgan Stanley, or Goldman Sachs.
There’s nothing wrong with having a broker, but you should be aware of the differences between brokers and other types of advisors, and you should know what you’re paying for their services. Brokers are not bound by the fiduciary standard and can recommend investments that pay them a commission, even if the investment isn’t in your best interest or there are cheaper options available.
2. The Independent or Dually-registered
Independent advisors can charge a flat fee or a percentage of assets under management, but may also charge a commission on certain investments or insurance products. As such, they’re typically labeled “fee-based” and are still affiliated with a broker-dealer, even though they use a separate brand. Are they required to act in your best interest? Sometimes, but not always.
How can you tell if your advisor falls into this category? They are tied to a specific brokerage firm, and at the bottom of their website and business cards, it will say “Securities offered through…” with the name of the brokerage firm with which they are affiliated.
3. The Fee-only Fiduciary
Fiduciaries cannot earn commissions and must make recommendations in your best interest. They are known as “fee-only” because their only source of compensation comes directly from clients. Their fee may be based on a percentage of assets or a flat retainer fee. Glassman Wealth charges fees based on a percentage of assets of under management, or in some cases where it makes more sense, a flat annual fee.
In the past, firms like these (Registered Investment Advisors, or RIAs) were small “mom and pop” organizations, but nowadays their services are often as robust as what you would find at larger firms, without the conflicts of interest. This means that they can help with all aspects of your financial life – from budgeting to estate planning to investment management.
How can you tell if your advisor is a fiduciary? Ask them. Fiduciary or not, you should still do your research to make sure your advisor is acting in your best interest and that their fees are competitive.
4. The Hourly Planner
Hourly planners provide the basics to help you get started with a financial plan. They may offer investment management advice, but they normally don’t manage your investments for you or provide ongoing monitoring of your financial situation. Their services could involve a review of your current investment allocation, insurance coverage, tax returns, or budgeting. Many will complete a full financial plan for a flat project-based fee.
Hourly services can often be the most cost effective option for individuals with simple financial situations who are comfortable managing their own accounts, or for those just starting out who need general financial advice. We often refer young couples with limited assets and college debt to Garrett Planning Network, a vetted group of hourly planners located around the country.
Regardless which type of financial advisor you use, it’s important to know what you’re paying. The chart below should help:
|Sources of Compensation||Fiduciary?||How to Know|
|Broker||% of AUM, commissions, product-based fees||No||Employed by the brokerage firm|
|Independent / Dually-registered||% of AUM, commissions, product-based fees||Usually no||“Securities offered through…”|
|Fee-only Fiduciary||% of AUM or flat fee||Yes||Ask them|
|Hourly Planner||Hourly fee||Yes||You get an invoice when you use them|