Welcome to “The 2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.
Today’s question is about investing; specifically, how much it costs to hire a fee-based financial planner.
If you’ve been around this website for long, you’ll know I’m no fan of traditional commission-based advisers. In my opinion, an adviser who charges by the hour is a much better way to go.
To understand why, and to learn how much services like this cost, watch the following video. Or, if you prefer, scroll down to read the full transcript and find out what I said.
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For more information, check out “3 Questions You Must Ask When Seeking Honest Investment Advice” and “Is Your Financial Adviser a Crook? Here’s How to Find Out.” You can also go to the search at the top of this page, put in the words “financial adviser” and find plenty of information on just about everything relating to this topic.
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Got a question of your own to ask? Scroll down past the transcript.
Don’t want to watch? Here’s what I said in the video
Hello, and welcome to the “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this two-minute answer is brought to you by MoneyTalksNews.com, serving up the best in personal finance news and advice since 1991.
Let’s get right into today’s question. It’s from Larry:
“What should I be expected to pay for a fee-only financial adviser? If that adviser receives commissions, should they be returned to the client?”
Larry, I’ve got three things for you:
Thing No. 1: Understanding adviser compensation
Let’s understand how advisers get paid. There are three common ways.
First, an adviser can be fee-based. In this situation, an adviser charges you a fee for advice, just as a doctor, lawyer or certified public accountant would. This is probably the path to the most objective advice.
Second, an adviser can be commission-based, meaning he or she earns a commission when you invest in a financial product.
I don’t like commission-based sales. I worked as a commissioned-based financial adviser for 10 years, and I can assure you that while individuals within this system may be both intelligent and honest, this isn’t a system that rewards conscientious counseling. Would you expect objective automotive advice from a car salesman?
Finally, advisers can be paid through a “wrap” fee based on the assets you place with them. In other words, you give them $500,000 and they charge you 1 or 2 percent a year of that amount, or $5,000 to $10,000.
I don’t like this system either. It’s too expensive, and in some instances can put your adviser on the opposite side of the table from you. For example, say you want to pay off your mortgage and therefore need to withdraw $100,000 from your $500,000 account. Since your adviser is making money on that $100,000, he or she may advise against it, even if it is in your best interest.
In summary, when it comes to paying for investment advice, no system is perfect. But I prefer what Larry prefers, which is straight-up, fee-based, pay-by-the-hour advice. But how much do these advisers charge?
Thing No. 2: How much does it cost?
The question of how much an adviser should charge is a simple one. Unfortunately, the answer isn’t.
Like a doctor, lawyer, CPA, mechanic or anyone else, these folks can charge anything they want. They could charge a $3,000 minimum to set up a full financial plan. Or, they could charge $25 an hour to answer a question.
Since there are different ways fee-based professionals charge, you really have to talk to several and ask. Then, see what seems fair to you. How will you find several to talk to? One idea is to go to the National Association of Personal Financial Advisors at NAPFA.org. There, you’ll find a ZIP-code search to find fee-based advisers near you.
Before you talk to any kind of professional, make a list of things to ask, then use the list consistently each time you meet with a new professional. See what their credentials are, along with their cost. Ask how long they’ve been in the business, what education they have and what professional associations they belong to. Ask if they’re a fiduciary: That means they’re legally required to put your interest ahead of their own.
Thing No. 3: Nobody’s perfect
There are some cons to fee-based advisers. One of them I just mentioned: They can be expensive. An adviser may charge $100 per hour, but may have a 10-hour minimum. Another potential drawback of hourly professionals: Unless you’re sitting in front of them, they could be charging for more hours than they’re actually putting in.
If you seek fee-based advice and find it’s too expensive — or if all you want is a little guidance and maybe a question or two answered — here’s another idea: Try going to a local CPA. There are CPAs with a PFS designation, which stands for Personal Financial Specialist. They may not charge as much as the other guys, and they’ll likely have all the knowledge you need. (Disclosure: I’m a CPA myself, although I’m not in the business of accounting or personal financial advising.)
Hopefully that answers your question, Larry. Meet me right here next time!
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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.
I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.
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