Monthly Archives July 2020

As of 2018, there were about 352,000 personal financial advisors in the US. “Financial Advisor” is not a regulated term, so it covers a broad range of services and business models. This article will look at the different ways that financial advisors get paid and answer the burning question, Are they actually worth it?

Commissions

Many financial advisors are salesmen who earn their keep through commissions on the products that they sell. Some will tout their services as “free” because you do not have to pay them anything directly. However, theirs is a business and not a ministry, so it is not free. You are paying them for their services, the money just goes to the financial product company first. 

The problem with this model is that it creates a lot of conflicts of interest. You want the financial product that is best for you and the advisor wants to earn money to feed his family. Unfortunately, those two goals do not always line up perfectly. Advisors are often incentivized to sell certain products based on the commissions they receive instead of how well they meet the needs of the client. On top of that, you usually have no idea exactly how much you are paying the advisor, which doesn’t sit well with me.

Are these advisors worth the commissions they get paid? Some are and some aren’t. Some commissioned advisors merely compare your information to their chart of the three or four financial products that their company sells and tell you to buy the best match. You could do that yourself online without paying such a high commission. And doing it independently, you would have more options resulting in something that is a better fit for you. That advisor is not worth it.

Some advisors are highly knowledgeable and will take the time to sit down with you and get to know your personal needs and goals. They will then research the different options and find one that meets your own unique needs, regardless of whether they could get a higher commission with a different product. This is the kind of advisor that is worth the commission.

Asset Management (AUM) Fees

Over the past 20 years, charging a fee based on assets under management (AUM) has become very popular among financial advisors who don’t want the conflicts of interest inherent in the commissioned sales model. The way it works is that you invest your money with the advisor and they take out a regular fee from the account calculated as a percentage of the account. Probably the most common AUM fee is 1%, which means that if you have $250,000 invested with an advisor, you would be paying them $2,500 a year. 

This model better aligns the interests of the advisor and client because as the client’s wealth grows, so does the advisor’s fee. It is not without conflicts of interest, though. What happens if a client is trying to decide between paying down their mortgage and investing more money? The advisor only benefits from one of the two options but it might not be the best option for the client.

The other problem with this model is that it restricts an advisor’s services to only those who have already accumulated a significant amount of wealth. Many of these advisors have asset minimums, such as requiring at least $500,000 to work with them. It’s not because they are greedy, it’s because they need to keep their business profitable. Advisors must receive a minimum amount of money to make the work of opening and managing an account worth the effort.

Are these advisors worth their fees? Some are and some aren’t. Some advisors transfer your accounts into their management, start collecting their fee, and you never hear from them again. You have no idea what your money is invested in, how it is performing, or if the investment strategy aligns with your goals. These advisors are not worth their fees. But then there are some that meet with you twice a year to review your financial situation and goals. They reach out to you when the market drops to make sure you are okay and regularly monitor and rebalance your accounts to ensure you are on track. These advisors are worth their fees.

Hourly Fees

Some financial advisors don’t want to work on commission but want to be able to work with people who have not accumulated wealth yet, so they work for hourly fees. Fees can range anywhere from $100 to $400 an hour depending on the advisor and the complexity of your needs. The nice thing about hourly fees is that it’s very clear what you are paying and what you are getting for it. There are no surprises and you only have to pay when you actually need help. 

Some advisors shy away from this model, though, because it can discourage people from seeking help when it would benefit them the most. To understand this better, think of a person that doesn’t have health insurance. They get a bad stomach ache but don’t want to pay to see a doctor if it is just indigestion. It continues until their appendix bursts and they end up in the ER. It would have been a lot easier and less painful if they had an ongoing relationship with a doctor that could have caught the problem and prevented the ER visit. People do the same thing with finances. It’s easy to wait until things get really bad to seek help when you could have prevented the problem by seeking help sooner.

Are these advisors worth their fees? Some are and some aren’t. If they give good advice and solve your problem, then they are. If not, then they aren’t.

Flat Fees

The final way that advisors get paid is through flat fees. This could include a flat fee for a one-time engagement or a flat fee for ongoing services. It is different than hourly fees because the advisor doesn’t track hours in order to bill you, they quote you a fee upfront and that is what you pay regardless of how long it takes the advisor. Flat fees for ongoing services are similar to the AUM fee model because you have an ongoing relationship but it is different in that the fees are not dependent upon stock market performance and you don’t have to have investable assets to work with the advisor. 

Like with hourly fees, paying a flat fee cuts down on conflicts of interest. Flat fees are also nice because you know exactly what the engagement will cost upfront and you don’t have to be as worried about the clock as you would be with hourly fees. It can be harder to find an advisor that charges this way, but they are out there and it is a growing movement.

Are they worth their fees? Some are and some aren’t. These advisors can have the same failings as AUM advisors who neglect you and hourly advisors who don’t know what they are talking about. And they can also be absolutely wonderful and help you achieve your goals in a way that you never could have done on your own. 

Are Financial Advisors Worth Their Cost?

As you’ve probably caught on, the answer is that some are and some aren’t. A good financial advisor is worth more than his or her weight in gold. A bad financial advisor is like a bad dentist. You can end up in much worse condition after working with them than you had been in before the encounter. 


Personally, I believe that everyone can benefit from working with a good financial advisor. I know that one and a half hours with a financial advisor drastically changed my life for the better. But I also hear stories about the situations that people end up in after working with a bad advisor and I don’t blame people for avoiding them. Next month, I’ll give you some tips on how to find the good ones.