Financial advice is something many need, but few want to pay for. It’s not all that surprising that financial advisors tend to join the ranks of lawyers or used car salesman – the line between advice and salesmanship is often blurred.
Financial Advice Dividing Lines
By far the biggest differentiator in financial advice is how the advisor is paid. Here are the typical compensation methods:
Commissions – The most common fee schedule is based on commissions on sales. A commissioned advisor charges nothing for advice. However, he or she is compensated on any sale. Generally, commissions come in the form of sales loads on mutual funds. Also, 12b-1 fees are charged on assets each year which is paid directly to the advisor. Sales loads can go as high as 8% on the purchase or sale and 12b-1 fees are capped at .75% per year. Remember, loads and 12b-1 fees are purely fees for the advisor and firm.
Fee-only – Fee-only advisors charge a fee to their clients in the form of an annual fee as a percentage of assets, or a flat fee on an hourly or per-service basis. For example, you might pay .50% of assets each year for an advisor to regularly look over your investment portfolio, recommend new products, or help with other services like estate planning or will writing. Alternatively, fee-only advisors can be hired on an hourly basis.