The Cost of Investing

Understanding how an advisor charges for their services is imperative in finding the right fit for your personal situation. Generally, most advisors either are compensated through upfront commissions for products they sell or on an ongoing basis through a percentage of investments that they manage on your behalf. Neither arrangement is necessarily better or worse. It is usually a good idea to discuss how an advisor gets paid, and why they chose that method. Also, if an advisor is getting paid upfront commissions, it may be beneficial to ask how often they change investments and if additional commissions will be charged when they do so. Cost is an important consideration when choosing an advisor, and they can vary substantially from one to another, so make sure you do your homework before hiring your financial professional.

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When determining the best cost structure, it’s important to understand your current needs and how much assistance you need from a financial professional. For example, if you mainly just want help opening an investment account and getting started on a savings plan, a professional that works under a commission arrangement may be a good fit. However, if you have multiple planning needs where you will need regular ongoing meetings and support, a fee-based advisor may be a better fit and more specifically a fee-based advisor that is at least on the “Wealth Manager” level on the advisor pyramid.

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Typically, there are three different ways that an advisor gets paid.

  • Commissions for certain financial transactions, such as the sale of insurance products or the buying and selling of securities. For example, if you invest $100,000 into a security there is a 5% commission fee charged to buy the security. The advisor would get $5,000 commission and $95,000 would be invested.
  • Fees charged as a percentage of your assets the advisor is managing. For example, an advisor is managing $100,000 and they charge a fee of 1% annually of the assets managed, you’d pay $1,000 for the year. Often times those fees are pulled from the account on a quarterly basis.
  • Retainer or monthly subscription charge for services. For example, you pay $150/month for financial advice and investment management.

Advisors who are compensated by commissions, typically will provide investment advice when the securities or products are purchased, but will not provide long term planning.  Conversely, an advisor who charges a percentage of your managed assets will usually provide ongoing financial planning and investment advice.

Not all financial advisors work under the fiduciary standard. Investment advisors are bound by a fiduciary standard that places their clients’ interests ahead of their own. Brokers work for broker-dealers, whose interests they serve. They follow a suitability standard, which means only that transactions must be suitable for clients’ needs.

The way that you pay your advisor can significantly impact how much you will pay for changes to your investments.  If you pay a percentage of assets managed, the fee will be on the cost to trade out of the positions, which is very likely minimal.  If you pay commissions, you will pay the full commission charged which can range.

Commissions are paid upfront based on the initial investment, there is no incentive on future growth of the assets. If you pay your advisors a percentage of assets they manage, as the account values grow, the fee the advisor collects also grows.

The Next Step

As you consider the right next step for you given your unique situation, please feel free to contact us to further explore this and other investing topics. At Avery Wealth we believe education and information is key to reaching your goals.

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