It’s a hard fact that when you most need a financial advisor, you might also wonder how you’ll pay for one. If your budget is a mess and your investments aren’t doing well, you may well ask if you can afford the help you need! However, financial advisors can be paid in different ways, some of which won’t require you to lay down much money upfront. Depending on your situation, one pay structure or another might come out cheaper for you.
Each advisor has their own preferences for payment. Many combine different pay structures. Some will work with you if you want to pay a specific way.
Some advisors charge the same way as your accountant, trainer, or therapist: by the hour. This can be a handy pay structure if what you want is to come in once or twice to get some immediate help. They can work with you on a budget or debt reduction plan, and once that’s done, you don’t have tot return. This is useful if you don’t want to commit to a long-term relationship with an advisor, but just want help on a limited-scope project.
Another fee-only structure is project-based pay. This is when you have a specific project you need help with. The advisor can quote you a price for the whole project you have in mind, and will work with you until the project is done.
Both these structures are called fee-only, meaning you only pay the flat fee. Fee-based pay structures will usually be some type of hybrid including fees.
One major advantage of a fee-only pay structure is the lack of any conflict of interest. Your advisor gets paid no matter what they advise, so they have no motive to encourage over-trading or unnecessary purchases.
Commission-Based Pay Structures
An advisor who earns commissions will earn money whenever you buy financial products from them. This can be cheaper than paying hourly, since you pay only when you buy something. When you work with an hourly advisor, you may still have to find a broker when you want to buy a financial product. So having an advisor who can work for you on these purchases, by commission, can cut down your costs.
The potential downside here is that it can set your interests and your advisor’s at odds. Maybe it isn’t best for you to buy a product, but they could earn a commission if they recommend it to you. Financial professionals such as insurance brokers or stock broker-dealers in particular may recommend things more for their benefit than yours. But certified financial planners and registered investment advisors must act as fiduciaries. This means they are legally required to act only for your benefit, not their own.
Paying By Percentage
The final option is to pay a percentage of assets under management (AUM). You will pay 1-2% of your total portfolio to the advisor. Some advisors charge a lower percentage for larger portfolios.
These percentages may seem like a lot of money, especially if your portfolio is large. But a good advisor can add much more value than they charge you. If they can increase your portfolio’s growth by even 3%, you’ll receive more than your money’s worth from their expertise.
The advantage of this system is that your advisor has every motive to grow your portfolio, rather than to encourage you to buy products. Your success and their success are the same thing. It also means that, if you’re investing on a small scale, you might pay less than you would hourly. Some advisors set aside time to work with lower-income clients, aware that they won’t earn much for their work. But, if they help you get your financial house in order, you might later be able to invest on a much larger scale. Their investment in you will pay off!
How Do You Want to Pay Your Advisor?
As you can see, the pay structures available will vary based on the services you want. You may also select a pay structure because you feel it will be more impartial, or because it will be cheaper for you. Once you know what sort of service you want and how you want to pay for it, you can contact us to be matched with an advisor who’s perfect for what you need.