When considering how to pay a financial advisor, the most important factor is the type and level of service you expect.
If you feel all you need is advice on how to allocate investments, an investment broker may be sufficient. Brokers typically charge a commission. I won’t argue whether commissions are a good way to pay for a one-time recommendation, but I do believe they are a poor way to pay for ongoing advice, which, in my experience, is what most people actually need.
A comprehensive financial plan is an invaluable tool to assist in achieving long-term goals. For this reason, a flat fee for an initial plan can make sense. That plan should go well beyond investments. It should include risk management (insuring against what can go wrong before investing for what can go right) along with protection planning for death, disability, long-term care, and liability exposure. It should also address estate planning. Lastly, because it is our patriotic duty to pay as little in taxes as legally possible, a financial plan should also include a tax analysis.
In my experience, the most critical role of a financial advisor is ongoing behavioral coaching: helping clients stay disciplined through all the fads and fears of a lifetime of investing. The most critical points when the coaching matters most are during extreme highs and lows of the financial markets. Because of this, an asset-based fee often makes the most sense. Commission and flat-fee structures don’t typically compensate an advisor for the kind of ongoing, consistently delivered guidance required – especially when needed most.
If you were to run the numbers, you’d likely find the average cost of a financial advisor, regardless of how they are paid, ends up being around 1% of the assets they manage. I believe this is the best compensation structure. When your investments go up, the advisor’s fee goes up. When they go down, the fee goes down. The client and the advisor are on the same side of the table.
So, the question becomes whether that fee is worth it to you. Here are three ways to think about it:
- Do you believe the advisor can help increase your rate of return by 1% or more compared to what you’re doing now?
- Do you believe the advisor can help you avoid mistakes that could cost you 1% or more? This is often most valuable to an investor.
- Do you believe the advisor can save you more than 1% in time, headaches, stress, record keeping, taxes, and financial complexity?
A good advisor will make sure you understand exactly what you are paying for. This allows you to decide whether the value you’re receiving justifies the cost. You should feel their value is more, ideally much more, than what you are paying.
I hope this was helpful. If you would like to discuss the value WealthPlan Advisors Group can bring to your table, please reach out.