Do you understand how advisers charge for retirement planning services and products? The financial adviser industry earns its keep from clients through a variety of payment models. However, not all advisers offer a range of models to clients. First, let’s list some models to look for: 1) asset-based fee, 2) commission-based, 3) hourly fee, and 4) retainer.
The traditional model is the asset-based fee. Each year, an adviser will charge a percentage of the assets you have under management. This fee can range from 0.5 percent to 2 percent. According to FA Insight, the asset-based fee model is the most common arrangement advisers strike with their clients; it’s a model used 85 percent of the time by advisory firms. In concept, the model encourages the adviser to work as hard as he or she can for you. That’s because growing client assets equal more revenue for the adviser.
The model doesn’t make as much sense for someone with assets under, say, $100,000, though. Here’s why: Let’s say a client makes a one-time $25,000 investment. The client never makes another deposit. But the annual management fee is one percent, so over the next nine years the investor has paid $250 per year, or $2,250 (i.e., assuming no growth, or more if the account was greater in value each year than the initial $25,000 deposit). If, instead, the investor chose a commission-based model, he would have paid a one-time fee of, say, 5 percent on the $25,000 initial investment, which is $1,250.
While a commission-based model can be good, it’s also quite easy for someone to purchase financial products on their own, without paying a commission. And some advisers who also work as brokers (i.e., someone taking a commission on the sale of financial products) may find it easy to justify the sale of one product over another, in part, because of the higher commission.
Some advisers offer clients a pricing model based on an hourly fee. It’s as simple as it sounds. You pay only for the time you believe you need from your adviser. The issue with this model, however, is that it may discourage investors from thoroughly discussing options with their advisers. And some less than scrupulous advisers may look for ways to set the clock in motion and keep it going to earn more of a fee.
The retainer model isn’t commonly offered. But here’s how it works. An investor would pay his or her adviser a set annual fee. The fee would include the adviser developing a customized financial plan, an agreed upon number of planning meetings, assistance with asset management, periodic consultations by phone, and interactions by email or text message.
Each payment model has its pros and cons. But whether your retirement planning needs involve transactions or services, the best adviser is the one who offers you two things: First, your adviser ought to offer an array of payment models because no single model is best for all clients, at all times. Second, your adviser’s value should come from his or her guidance, ability to educate you about options, and commitment to helping you succeed, not how you pay them.
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