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3 Ways To Discover What Your Financial Advisor Is ACTUALLY Charging You

Do you know how much your financial advisor is charging you? It’s not uncommon to have little to no practical knowledge of how financial advising works or to not know how to find buried costs within your plan. Additionally, it can be intimidating to ask your advisor what’s going on with your portfolio.

Between different pricing structures, hidden fees, and how your advisor may work, it can all feel overwhelming and frustrating. It’s no surprise that many people struggle with deciphering their charges.

How do you know if your advisor is charging you fairly? How do you know if they’re the right fit? The plan that’s right for one person’s financial situation isn’t necessarily what’s right for another person’s financial situation.

Thankfully, when given the right information, understanding how financial advisors charge their clients isn’t so bad. From understanding mutual funds to asking the right questions, there are several different ways to discover how much your financial advisor is actually charging you.

1. What Pricing Structure Are They Using?

Different financial advisors use different pricing structures. Some advisors charge by the hour and some charge you annually. Some take a commission while others take a percentage of your assets. Also, some plans favor small portfolios, while others benefit larger assets.

Each structure has its pros and cons and will apply to every individual differently. Knowing what structure your financial advisor is using is an important way to understand how much they’re actually charging you. This is the best way to find out if you’re spending money on the right advisor.

A Percentage Plan

Most financial advisors charge you by taking a percentage of your assets under management, also known as AUM. In 2018, the average investment advisory fee was 0.95%. So, if you have assets totaling one million dollars, your advisor will make $9,500. Sounds simple enough, right?

Is a percentage plan right for you? Some advisors have a tiered approach to percentage plans, so they don’t take as large of a percentage from a major client.

If your financial advisor is using a percentage pricing structure, make sure you know what that percentage is and whether they have tiered pricing. From there, it’ll be a lot easier to figure out how much your financial advisor is charging you.

Fee-Only Or Commission?

Fee-only pricing structures and commission structures work a little differently, and they both have pros and cons. It all depends on what your individual needs are. Neither approach is all good or all bad.

Flat-rate pricing, whether by the hour, quarterly, or annually, can be more expensive than commission pricing, especially for less wealthy individuals. Since they can’t sell you certain products, you may need to hire a broker as well—making you pay two people instead of one.

On the flip side, commission-based pricing can keep you from spending the extra cash required when you work with a broker. Financial advisors working on commission can help with specific needs like disabilities or health insurance.

Are Hourly Fees Worth It?

If you have a pretty hands-off approach to your finances, an hourly rate may work best for you. In contrast to paying an annual flat rate, hiring someone working on commission, or giving away a percentage of your assets, paying an hourly fee is definitely a low-key option.

Paying someone by the hour gives you a lot more control over how much money you spend. If you just need to check in with an adviser every so often, an hourly rate may be your best bet.

Unfortunately, if you decide that a by-the-hour approach is best for you, you may have to put in some extra effort to actually find a planner who even offers hourly rates.

What if your portfolio isn’t so low-key? If you’re working through some complex financial problems, like a marriage, a divorce, or a recent job loss, those hourly fees can add up fast. You may be calling your advisor more often than you’d like to go over some new information or get fresh advice.

If you’re someone who needs financial advice pretty often and you’re paying by the hour, you could be wasting a lot of money. In this situation, an annual plan may better suit your needs.

2. Are You Wasting Money?

Investing your money can be an extremely complex process, and even after all the work you put into it, you may be paying more than you really need to. It can be frustrating to see how much time and energy you’re putting into your finances and not be sure if you’re getting much bang for your buck.

It could be that you expected your portfolio to have grown more by now, or you just don’t like the uncertainty—you may be wondering whether you’ve actually been wasting your money.

With everything from high advisor fees to hidden fees, there’s a pretty good chance you don’t fully understand how much you’re spending. What’s truly necessary, and what’s just a burden on your finances? Is your financial advisor leaving you blissfully unaware of your situation? Are they maybe even hiding costs from you?

Fees Are Most Likely Higher Than You’d Think

What percentage of your assets under management is going to your financial advisor? What seems like a small difference in percentage can add up to hundreds of thousands of dollars over a lifetime.

Beyond that, accounts such as mutual funds often add on additional fees, taking another percentage out of your investments. Depending on which mutual fund share class you’ve put your money into, you could be paying a much higher rate on the same investment than other classes.

Some classes with low rates are only available to people investing a large amount of money, making lower investments possibly more expensive.

It’s so hard to grasp financial advising that a lot of people don’t realize they’re paying fees at all on 401(k) plans. This is such a prevalent problem that 19% of baby boomers polled in a Rebalance IRA study believed they were paying less than 0.5% in fees.

It’s totally justified to feel like it shouldn’t be your job to understand all this jargon—after all, you hired a financial advisor! Why should you have to unravel share classes, thresholds, and load fees? With so many complex details, it makes sense that so many people don’t know how much their financial advisors are actually charging them.

Who Are You Working With?

Maybe your financial advisor belongs to a large, nationally recognized firm, with a price tag to match. Maybe they’re charging extra for their expertise or their experience. It’s easy to think that just because you’re spending more, you’ll get more money in return, but that’s not necessarily the case.

It’s also possible that you could even be paying for the wrong portfolio management style. For example, an actively managed portfolio accumulates fees when your financial advisor buys, holds, or sells assets in your portfolio. You’re paying big bucks for the close attention your advisor pays to the day-to-day fluctuations of the stock market.

A passively managed portfolio costs less because your financial advisor isn’t being so hands-on with your portfolio, and instead holds on to your assets for the long-term. A passive financial advisor is following the Efficient Market Hypothesis, which states that the quick-change actions of an actively managed portfolio don’t make much of a difference. All the effort that goes into active management simply doesn’t apply.

There’s no real consensus on which approach is better, so if you’re questioning the amount of money you’re paying your financial advisor, an actively managed portfolio may be a good place to start.

Hidden Fees

It’s easy to lose track of how much you’re spending on investments. Fees are hidden in the small print, and it can be difficult to even understand what you’re being charged for.

On top of that, you may be paying for a plan that ends up charging you more than necessary. Several services can be one-time fees, rather than a lifetime of recurring expenses. For example, while a retirement plan may require ongoing financial advising, an insurance-based plan may be suitable for a one-time fee.

Commission-based financial advisors may give you an annual asset managed percentage that they charge, without mentioning hidden transaction fees, sales fees, and management fees that you will undoubtedly have to pay on top of your percentage.

3. Ask The Right Questions

Perhaps the most obvious solution to revealing how much your financial advisor is charging you is to just ask them. How will you get any real answers unless you ask? Other financial advising firms can also run detailed analyses of your portfolio. That way, you can see what your current financial advisor is charging you.

Compare With Other Advisors

A great question to start with is: Are you the best advisor for me? With options ranging from robo-advisors on the internet to high-level advisors from distinguished firms, it’s natural to question whether the person you’ve got is the right person for the job.

What can one advisor give you that another advisor can’t? How can an active portfolio manager be better for you than a passive one?

What Fees Am I Paying?

With so many complicated twists and turns involved in your finances, you probably want to hear it from the horse’s mouth. Are there hidden fees you should know about? Are there fees from mutual funds you haven’t yet discussed?

Since such small percentages can pack such a big punch, it’s important to ask about the finer points of your portfolio, not just their annual percentage.

It’s also a good idea to know just what services your financial advisor provides, and whether you’re using all of them. If you’re not utilizing some of the things offered, you may be unknowingly paying for them. If they don’t offer services that you feel you do need, you could decide that you’d rather pay a financial advisor with more specialized knowledge.

Planning For Retirement

What are your financial goals for retirement? Does your financial advisor understand those goals? What are they doing to make sure you actually achieve them? If you haven’t had this discussion already, maybe this is a good time to start.

Some advisors specialize in financial planning for retirement. If you don’t feel satisfied with how your portfolio is being managed, you may feel that you should switch to a retirement specialist to safeguard your investments.

On the other hand, you may be spending money on a financial advisor who specializes in retirement planning when that’s not really where your focus is. You could be wasting money on a specialty that doesn’t really apply to your needs or your situation.

What’s The Deal With Taxes?

There are several ways to write off investment expenses for your taxes. Your financial advisor should know this, but it can’t hurt to ask. Is your advisor doing everything they can to save you money on your taxes? This can be a huge expense if they don’t truly understand the ins and the outs of our tax system.

Your advisor should be doing everything they can to maximize your tax deductions, especially if they offer tax advice as part of their service. It’s their job to comb through the finer points of the tax code so you don’t have to.

What Can We Negotiate?

It’s completely fine to try to negotiate the price of your financial advisory fees, especially since they can add up so quickly. This can be an anxiety-inducing thing to try, but at the end of the day, it’s your money they’re working with.

If you have a large portfolio for them to work with, you may be able to use that as leverage—after all, a large account makes your advisor more money than a small one. They may be willing to give you some wiggle room if they believe you can still net them a sizable paycheck.

If you don’t need all the services your financial advisor provides, you can also counter that you shouldn’t be paying for the things you didn’t need in the first place.

Maybe your financial advisor is taking an active approach to your investments, and you don’t think it’s working. It would make sense to ask them to try a more passive approach. Conversely, you may believe that your investments are stagnating because your advisor is taking a passive approach. See if you can angle for an active approach without spending too much more money.

What’s The Bottom Line?

Your savings are important, and the people looking after them should be giving them the appropriate care and attention. Because such tiny percentages have the power to completely change your portfolio, you deserve to know exactly what you’re being charged for, and why.

You want your savings to be waiting there for you when you’re ready to retire, and you don’t want any unknown expenses eating into your bottom line. Your advisor should value your security and the hard work you’ve put into your finances by saving you all the money they can and being transparent about the process.

Yes, there is a lot of confusing information that goes into financial planning, but it doesn’t need to be your job to do it all by yourself! Understanding their pricing structure, keeping an eye out for sneaky money-wasters, and asking some honest questions is sure to keep you informed and satisfied.