Financial advisor fees and how to prepare for your initial meeting
Could you improve on how you are currently managing your finances? Perhaps you don’t have time to do your own financial planning or have experienced a life event such as inheritance, major illness or birth. A financial advisor can help you achieve your life goals and build financial security. Working with a financial advisor is a smart move for many people and there are hundreds of professionals in the marketplace ready to give you financial advice and manage your money.
How do you find one you can trust?
A good starting point is asking family, friends and co-workers — as well as your CPA or attorney — for referrals. When following up on these recommendations, a key consideration is determining how advisors are compensated.
Typically, financial advisors receive compensation in five ways, including:
Salary — You pay the company for which the advisor works, and the company pays a salary to the advisor.
Fees — You pay the advisor a fee, based on an hourly or flat rate, or based on a percentage of your assets or investment income.
Commissions — The advisor receives a commission from a third party for any products you may purchase. Commissions are usually a percentage of the amount you invest in a product.
Commissions and fees — The advisor receives both commissions and fees. For example, the advisor charges you a fee for the work to develop a financial plan and also receives commissions from any products sold when the plan is implemented.
Fee offsets — Some advisors may offset a portion of the fees you pay if they receive commissions for carrying out their recommendations. In other words, the advisor reduces his or her fees by whatever is earned from commissions.
Consider the pros and cons of each method when deciding which type of compensation structure works best for you. Advocates of fee-only advisors say these advisors provide objective advice that is not motivated by the frequency of trades or which investments are purchased. On the other hand, proponents of commission-only advisors argue that you are only paying for implementation with them. The important thing is to understand how they get compensated.
There are other fee-related issues to consider as well. Does the advisor charge a minimum fee, have a minimum net worth or income requirement or charge for an introductory meeting? Does the advisor receive referral fees from attorneys, accountants, insurance professionals, mortgage brokers or others? You will want to find out whether the advisor has a business affiliation with any company whose products or services the advisor is recommending and whether or not he or she receives financial incentives for recommending certain financial products.
While it’s critically important to understand how a prospective advisor is compensated and what your costs will be, an equal priority is finding an advisor that you feel comfortable with. During initial meetings, consider asking the following questions:
How many years have you been in the business and what are your qualifications?
The age of an advisor may be deceptive since it is common to become advisors after leaving or retiring from other careers. Look for an advisor with proven experience in financial planning topics and who stays current with changes and developments in the field.
What is your approach to financial planning and what services do you offer?
The services a financial advisor offers depend on a number of factors including credentials, licenses and areas of expertise. Ask the advisor about the types of clients and financial situations the advisor typically works with. Find out about the advisor’s viewpoint on investing and his or her investment methods and ask about how the advisor puts together financial plans and works with clients. Make sure you can understand what the advisor is telling you and that the advisor treats you with respect and courtesy.
Will you be the only person working with me?
You will want to determine whether you will work with the advisor directly or will conduct business with another member of the staff. If you will work with an associate, you may want to meet the advisor and find out about his or her credentials and experiences. Make sure you ask if you need to sign a contract and what it obligates you to do and for how long.
Once you have met with the advisor, ask for referrals. Contact these sources to find out what it’s like to work with the advisor, how quickly phone calls are returned and how effectively questions are answered. You will also want to make sure the advisor has a clean record by contacting regulatory agencies like the National Association of Securities Dealer and the Securities and Exchange Commission.
When you work with a financial advisor, you’re creating the foundation for a more secure and fulfilling future. Taking the time to find a financial advisor who makes you comfortable and fits your situation will help ensure the future success of this important relationship.
This information is provided for informational purposes only. The information is intended to be generic in nature and should not be applied or relied upon in any particular situation without the advice of your tax, legal and/or your financial advisor.
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