Navigating the Different Types of Financial Advisor Fees

When embarking on the journey of financial planning, one of the critical decisions you'll face is how you want to pay your advisor. The fee structure can significantly influence both the services you receive and the cost you incur. 

There are ongoing disagreements between advisors who charge fees differently, and often the clients only hear the opinion of their advisor.  I personally know advisors and have worked at firms that charge each of these fees, and many of them are fiduciaries and will still put your interest first.  While I have my own opinions on which is best, no fee is a fit for everyone.  I think it’s critical to present you (the client) with the information and pros and cons of each and let you decide for yourself what makes the most sense for you. 

A broad characterization between the two most common types of fees is commission vs. fee-only.  Some advisors do one or the other, some do both (they are called fee-based). Here is a basic overview of the main types:

Commission Fees

The financial planning industry was largely established by selling commissionable products. For example, an advisor can sell specific mutual funds, annuities, or insurance products to their clients as they see fit.  Over the last two decades especially, these products have come under increased scrutiny and many advisors don’t sell any products at all.

PROS

• Product Access: Advisors might offer access to products that might be difficult to navigate independently.  

CONS

• Conflict of Interest: There's a risk that the advisor might recommend products that generate higher commissions for them and not take the client’s needs into account. 
• Lack of Transparency: It can be hard to discern how much you're paying in fees since they're embedded in product costs.
• Complexity: These products are often so complex that it is difficult for the client (and sometimes the advisor) to understand.   

Percentage of Assets Under Management (AUM)

This is one of the most common types of fees you’ll see from advisors nowadays. Most of the time the advisor charges you a percentage of the assets they manage for you.  For example, if you had $1 million with an advisor, and they charged you 1%, you’d be paying them $10k/yr.  If you’re going to choose one of these advisors, please make sure they manage your assets AND financial planning as well. 

PROS

• Alignment of Interests: Both you and your advisor benefit from the growth of your assets since the advisor's fee increases with the portfolio's value.
• Ease of Understanding: Straightforward to calculate; you see a percentage of your portfolio's total value.

CONS

• Potential for Bias: Advisors might be tempted to take unnecessary risks to increase the AUM, especially if they have performance thresholds.
• Less Incentive for Small Accounts: Advisors might not prioritize smaller accounts as much since their fees are lower. 

Retainer or Subscription Fees

While these two have differences, I think they’re similar enough to combine for a basic understanding. To put it simply, you pay a monthly, quarterly, bi-annual, or annual fee for advice and sometimes management. 

PROS

• Comprehensive Service: For a regular fee, you get continuous access to advice, which is great for evolving financial situations.
• Budget-Friendly: Can be more cost-effective for those needing regular consultations.

CONS

• Fixed Fee Pressure: There might be pressure to justify the retainer through constant service delivery.
• Less Flexibility: If your need for advice diminishes, you still pay the same fee.

Flat Fees

With these business models, it can be very simple; you make an agreement with the advisor to pay their fee (most of the time semi-annually or annually), and that won’t change unless you both agree.  

PROS

• Predictability: You know exactly what you'll pay for specific services or over a period, aiding in budgeting.
• No Growth Pressure: The advisor isn’t incentivized to inflate your portfolio value artificially.

CONS

• One Size Fits All: Doesn't adjust for the complexity of your financial situation or the time spent on your case.
• Potential Overpayment: If the service takes less time or effort than anticipated, you might feel you've overpaid.

Project-based or Hourly Fees

Some advisors see these types of fees differently, but I believe they are very similar.  You pay for the hours that it takes to finish and deliver a project or a financial plan.  I think this is about as simple as it can get.  

PROS

• Project-Specific: Ideal for those needing one-off advice or with specific, and defined projects like estate planning or tax advice, or for a full financial analysis and plan.
• Clarity: You pay only for the time used, which can be less if issues are resolved quickly.

CONS

• Estimation Challenges: If the project scope expands, it might necessitate renegotiation or additional fees.
• Clients Don't Reach Out: If you know that you'll be charged if you call or email an hourly-advisor, sometime you won't reach out at all.

What’s right for you?

Choosing the right fee structure depends on your financial goals, the frequency of your need for advice, and your comfort with various payment models. Look for structures where your advisor's interests align with yours, ensure you understand all costs involved BEFORE SIGNING ANYTHING, and consider the total value delivered, not just the cost. 

Whether you're just starting or looking to switch advisors, understanding these fee structures can lead to a more fruitful and transparent relationship with your financial advisor. If you want to learn more about why I chose an hourly-only, project-based approach, you can find out about it here.

*These models are subject to change depending on regulatory changes that may come in the future.