Hey there!
This is the third in a multi-part series where we evaluate the process of choosing a financial advisor. We’ve already covered the types and background questions you should ask.
For many, a big deterrent to using an advisor is the perceived cost. This week’s edition of The Boost will help help you ask the right questions upfront so that you get value out of an advisory relationship.
🧠 What you need to know
Advisor fees can significantly impact your long-term returns. For example, annual fees of $2K to $10K could amount to $200K - $1M of wealth lost to fees over a 30 year period, assuming historical market returns. However, if you’re not making the right financial decisions on your own, the fees could be totally worth it.
The three most popular advisor compensation models are:
Fee-only advisors
- They charge a flat fee, hourly rate, or percentage of assets under management (AUM). They don’t take commissions from third parties.
- An initial financial plan could cost $1,500 to $3,000.
- Hourly rates range from $150 to $400 or and retainer rates range from $1,000 to $7,500 annually.
- The percentage of assets under management (AUM) approach averages approximately 1% of assets each year.
Commission-based advisors
- They receive commissions from the sale and set of financial products, such as mutual funds, insurance policies, annuities, and specialized investment accounts like 401(k)s and 529 plans.
- Advisors might be incentivized to recommend products that generate higher commissions, creating potential conflicts of interest. For this reason, this model has been decreasing in popularity.
Fee-based model
- Fee-based advisors combine aspects of both fee-only and commission-based models.
- They charge clients a fee for their services but may also receive commissions from the sale of certain financial products.
Keep in mind that the type of advisor will also likely influence the compensation model.
The questions to ask:
Avoid surprises and ensure their fees are worth it to you with these questions:
- Are you compensated with a salary, fees, or a combination of both? It’s important to understand how much their compensation is driven by serving you. Advisors at larger firms are more likely to have a salary component.
- What services do you offer and how much time do you spend in each of those areas? Typical advisor services include investments, retirement, estate planning, building a financial plan, tax, education savings, and insurance.
- How much time do you spend on investment management each year? Investment management is just one aspect of an advisor's job. On average, advisors spend three hours per client per year on it.
- Are you a fiduciary advisor? These advisors have to make decisions with your best interest in mind. Stay away from those that aren’t fiduciaries.
- How many meetings are included in your fees?
- Can I reach out to you whenever I have a question? How quickly do you respond?
- If fee-based, what is the breakdown of your compensation between fees and commissions?
- If fee-based, how do you determine which products or services fall under the fee-based model and which ones generate commissions? Can you provide examples of situations where you might recommend commission-based products over fee-based services, and vice versa?
What's next
In the next issues of The Boost, we’ll dig into how advisors manage your investments. If there is a question you’d like us to address, reply to this email and let us know!
🤝 How can Mezzi help?
Whether or not you work with an advisor, Mezzi can help make sure your investments are on track to meet your goals. Specifically, use Mezzi to:
- Maximize tax-saving opportunities across self-managed and advisor-managed accounts
- Monitor and track performance of self-managed and advisor-managed accounts against key benchmarks
- Avoid investments that counteract the investment goals of your advisor-managed accounts, or vice-versa
- Easily share the allocations and holdings in your personally managed accounts with your financial and tax advisors - you can even invite them to collaborate
- Avoid violations of wash sale rules across personally managed and advisor-managed accounts
