Fees & Costs
Financial advisors come from a variety of disciplines: investment management, financial planning, securities brokerage, accounting, insurance, legal. They charge for their services through a variety of fee structures that reflect in part their core disciplines. There are pros and cons to any structure. Here are some of the more common structures.
Asset-based fees are determined as an annual percentage of the value of assets under management. Fees typically are calculated and paid quarterly. This structure has been used most commonly by advisors registered with or conforming to SEC oversight.
Commission-based fees are charged whenever securities are bought or sold. Total fees depend on the level of trading activity whether prompted by the client or the advisor. This structure has been used most commonly by FINRA-registered broker/advisors.
Flat-rate fees can be in the forms of annual retainers, hourly rates, or a combination. These structures have been used most commonly by advisors coming from fee-for-services disciplines such as financial planning, accounting or legal.
Additional costs can arise in the course of managing financial assets. A range of custodial costs can be incurred such as for money transfers in or out of an account. Schedules of any such costs should be readily available from any custodian.
Alignment
A client clearly must know what fees and costs will be incurred in the management of financial assets. Perhaps more important than knowing the amount is to know if any conflicts of interest can arise as a result of the structure itself. Simply put, and as a result of the structure, are the advisor’s interests aligned with the interests of the client?
Asset-based fees fees generally indicate that the advisor is continuously “on the clock” and readily available at all reasonable times to address client needs. Such an advisor may be serving as a fiduciary more transactional in nature. As such, the advisor level of duty extends only to determining the suitability of any individual investment.
An example can show why fee structure may not indicate alignment. Financial advisory firms may have multiple sources of revenue including asset-based fees, commission-based fees and other product-based fees. It is with the latter in particular that misalignment of interests may arise. Investment products including mutual funds and exchange-traded funds may contain other, quite legal revenue sources for firms who make client investments in such products. Advisor-employees of such firms may have compensation incentives tied to this revenue. A fund or ETF with such a revenue source may be suitable, but a fiduciary role has not been performed if advisor compensation influenced selection.
A client should be their own best fiduciary by committing to a rigorous level of due diligence. No questions are out of bounds regarding fee structures, services, alignment of interests or potential conflicts of interest.
Are you interested in learning more about fees and costs? Let us know and we will be in touch.