There are three primary types of client paid advisor compensation: hourly-fee, fixed-fee, and asset-fee.
When choosing an advisor, individuals should first decide the type of advisor compensation that makes them most comfortable. How an advisor is compensated can be a very important issue. When you hire a financial planner or investment advisor, 1) you pay directly for his services, 2) a third party pays your adviser for you, or 3) these compensation methods are combined.
There are also combinations of these two main compensation methods. How an advisor is compensated can be a very important issue. When choosing an advisor, individuals should first decide the type of advisor compensation that makes them most comfortable. The decision to pay directly for planning advice may be prompted by disappointment in prior experiences with commissioned advisers.
This article focuses on client paid compensation. For information on third party paid advisor compensation, see: Financial planner and investment advisor compensation paid by third parties. For The Skilled Investor’s judgment on preferred advisor compensation arrangements for individual investors, see: Does it matter how financial planners and investment advisors are paid?
These bullets summarize the three primary types of client paid advisor compensation:
Hourly-fee: You pay your advisor an hourly cash fee for services rendered. Fixed-fee: You pay your advisor a fixed or negotiated cash fee for an advisory work product. Asset-fee: You pay your advisor a percentage of the assets that he manages for you.
Hourly-fee and fixed-fee are the most simple and direct compensation methods. Hourly fees for a competent advisor can vary substantially, usually ranging from $150 to $300, although advisory fees above or below this range can be found. Fixed fees for a truly comprehensive financial and investment plan might range from about $1,000 to well over $5,000.
With asset fee based compensation, the advisor provides a set of services and takes a annual fee, which is a percentage of your assets under the advisor’s management.
The advisor will take custody of your assets, and periodically he will charge a management fee against your assets. This fee is usually based upon an annual percentage agreed to by contract. Annual percentages vary greatly by advisor and by the services rendered. TIAA-CREF estimated that fee-only asset management charges typically range from 1% to 3% of managed assets annually.1
In addition, asset management fees are usually charged as a declining percentage as the amount of assets [...]