In my experience, many people who have financial advisors do not know how much they are paying in fees. I’ve always found this strange, because this is incredibly unique when compared to other products and services that people buy.
I think part of the issue is that fees in the industry can be complicated. In this post, we will review the different types of fees that financial advisors charge.
Type of fee vs. level of fee
Before we discuss the different types of fees that financial advisors charge, it is important to recognize the difference between the type of fee and the level of fee. The type of fee is how it is structured – commission for buying a product, percentage of assets, hourly, flat fee, etc. The level is how high or low the fee is.
It is important to separate these two things, because when considering a financial advisor’s fee structure, both are important. An advisor may use one of the “better” types of fees, but the level of fees can still be inappropriately high for the services being provided.
Commissions vs. advisory/planning fees
An important distinction that can be made when looking at the types of fees financial advisors charge is the difference between a commission vs. an advisory/planning fee.
If an advisor is paid via commission, they are being compensated for selling some sort of financial product. Commissions are transactional. For example, if an advisor is an insurance agent and sells you a life insurance policy, they will typically earn a commission based on the policy. The same is true for commissions paid on brokerage transactions at broker/dealers and commissions paid on certain types of mutual fund transactions. Only advisors who work for certain types of firms, such as broker/dealers and insurance agencies charge commissions.
Advisory fees are charged by registered investment advisors to manage investments on a continual basis. Advisory fees are fees for ongoing advice – they are not earned by initiating transactions. Advisory fees can take the form of a percentage of funds managed or a flat dollar amount. Advisors can also charge separate financial planning fees (for example, a monthly fee or one-time project fee) for financial planning. An advisor must work for a registered investment advisor in order charge for advisory/planning fees.
Different fee types can be combined
Many financial advisors may charge both commissions for selling financial products and advisory/planning fees for giving advice. This is related to the fact that many advisors work for multiple different types of firms – they may be an agent of firm’s insurance agency, while also being an investment advisor representative of the firm’s registered investment advisor. An advisor who is paid both commissions and fees may advertise as fee-based.
Why Ulmer Financial is fee-only
In my opinion, advisors charging commissions for transactions is less than ideal, because it creates a strong incentive for the advisor to sell certain financial products. I am sure that there are commission-based advisors who do a good job. However, I think that an advisor is better aligned with their clients when they are being paid for investment and financial advice, rather than selling a certain product.
Advisors who only charge advisory/planning fees may advertise as being fee-only. I believe that this is the best and purest way for a financial advisor to serve clients well. This is why my business is fee-only. I believe it is best for an advisor to only be compensated directly by their clients, not by earning commissions from selling a firm’s financial products. Being fee-only also allows me to be very clear and transparent about what my fees are and list them right on my website.
If you have any comments, questions, or ideas for future posts, please let me know
I hope you found this post helpful and educational. If you have any comments, questions, or ideas for future posts, please let me know. You can reach me directly via email at crawford@ulmerfinancial.com.
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