There are several ways that a financial advisor can charge.  At D3, we believe there’s no “best fee structure”, which is why we utilize a few of the below models to meet our clients’ unique needs.  Although we don’t think there’s a “best fee structure”, we do believe that it is important to understand how you are paying for services, and what you are receiving in return.  See below for some examples of how financial advisors are compensated, and what might be the best fit for you:

One Time Fee for Service:

Some advisors charge a flat fee for their service.  Typically, this fee does not include investment management, but may include advice on one or many areas of financial planning such as retirement planning, education planning, investments, tax planning, cash flow management, and insurance.  This is a one-time fee, and leaves implementation & monitoring up to you.

I recommend this fee structure for the “do-it-yourselfer”, who doesn’t quite have the expertise to perform all of the analysis on their own, but is comfortable with the implementation and monitoring of advice.  The cost over a long period of time will be less than hiring an advisor to implement and monitor, but many find that they will need time, knowledge, and discipline to implement on their own.  Our Second Opinion Service, Goal Planning Service, and Broad Based Financial Plans are charged under this fee structure.

Fee as a Percentage of Assets Under Management (AUM):

This fee is derived from taking the value of your account, and multiplying that value by a percentage (typically between 0.5%-2% per year).  This is typically paid on a monthly, quarterly, or annual basis.   Charging as a percentage of assets under management typically includes implementation and monitoring of investments.  This fee structure can be appealing due to the advisors “skin in the game”.  If your assets go up, so does your fee, and vice versa.  Under this fee structure, your advisor should have incentive to grow and protect your investable assets, as their fee is tied directly to the value of your accounts.  It is important to understand exactly what is included in this fee, as some companies charge this fee solely for asset management, and charge separately for other areas of financial planning, and others include financial planning services in this fee.

I recommend this fee structure for anyone who does not have the time, expertise, or trust in themselves to implement, and monitor their investments according to plan.  I also recommend this fee structure for people who value in having an ongoing relationship with their advisor.  Our Advanced Portfolio Management, and Affordable Family Office Services charge a fee as a percentage of assets under management.

Fee as Retainer:

This is typically a flat fee, paid on a monthly, quarterly, or annual basis.  This fee may, or may not include investment management.  This fee can vary by firm, or even within a firm, depending on the level of complexity of your situation.  When choosing this fee structure, it’s important to understand the services received for the fee you are paying.

I recommend this fee structure for people who find value in having an ongoing relationship with their advisor, that may not meet the investable minimums of an asset based fee structure.  For clients that do not meet our minimum investable assets, our Advanced Portfolio Management, and Affordable Family Office Services charge a fee as a retainer.

Fee as Commission:

Charging a fee as a commission typically involves your fee being paid to implement an investment or insurance recommendation.  The benefit to this fee model is that you are likely paying your advisor only when they implement a recommendation (and maybe a bit more through 12b1 fees).  There are two big drawbacks; one being the lack of fee transparency, and the other being the potential conflict of interest of using a product that generates high fees for the advisor.

I recommend this model for people who can understand the fee structure, trust their advisor, and may not be able to use this fee structure for the advice they are looking for (such as buying insurance).  As a fee-only advisor, D3 does not use this fee structure.

 

-Adam Glassberg CFP®, CIMA®