Financial Advice

How Does Your Financial Planner Make Money?

Q. How much do financial planners charge for managing your money? is there a set fee?

A. Great question.

A financial adviser can be one of the best investments you’ll ever make, but you need to be informed when you pick an adviser.

Exactly how a financial planner gets paid is something that should be revealed when you interview the planner at your first meeting. If he or she doesn’t volunteer the information, or if the explanation is unclear, find another adviser.

“It is important to take stock of why you are hiring a financial adviser and what services they are providing for the fee they charge,” said Brian Kazanchy, a certified financial planner with RegentAtlantic Capital in Morristown, N.J. “Many advisers provide wealth management, which is the combination of investment management and financial planning.”

Others are paid only for their advice, and they don’t sell any products, manage investments or earn commissions on the investments you choose.

In simple terms, there are three basic ways: commission-only, fee-only and a combination of fee and commission. They may also be paid a salary plus bonuses, which would be paid for bringing in new business or selling certain products.

The combination of fee and commission is often called “fee-based,” said Jody D’Agostini, a certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown.

“These advisers may receive a fee for financial planning and a commission if they sell you certain services or products that the plan recommends,” she said.

Those who work as fee-only — who don’t receive commission — will charge you for providing ongoing advice.

“The fees can be either charged hourly, as a flat fee or as a retainer fee based on a percentage of assets under management or your net worth,” D’Agostini said. “It often is based on the amount of time required to manage your account.”

What Should I Expect to Pay?

A common fee schedule for a fee-only firm that manages your investments starts at 1% of assets under management, and scales lower at various portfolio dollar values, Kazanchy said. Some firms may charge more or less than 1%, or may separate investment management and financial planning fees, he said.

Either way, you want to make sure you’re getting your money’s worth.

“A terrific advisor will (a) learn about clients emotionally as well as financially, (b) engage in goal-focused long-term planning, (c) provide invaluable historical perspective in order to foster rationality under uncertainty, and (d) actively intervene against clients’ proclivities to overreact to extreme market phenomenon both positive and negative,” Kazanchy said. “This level of behavioral coaching may far outweigh the benefits received from the portfolio management, retirement planning, estate planning, tax planning and risk management advice.”

When an adviser sells products, or his commission or bonus is based on those sales, you want to be cautious. While most advisers are reputable, some may push products that aren’t right for the customer just so they can get more money in their pocket.

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This article by Karin Price Mueller was distributed by the Personal Finance Syndication Network.