Do you know how you pay your financial advisor?
Surprisingly, many people do not know the answer to this question.
The financial services industry is complicated and there is no single standard method for financial advisors to charge. It’s important for investors to understand the different ways available to compensate their advisor for their services. Certain methods may make more or less sense depending on what you want to get out of the advisor-client relationship. In this blog post, I break down the three most common ways clients compensate their financial advisors.
Brokerage
Brokerage is the traditional advisor-client relationship. Picture the old school stockbroker who gets a commission for each trade. When you hire your advisor in a brokerage capacity, you typically are paying the advisor to advise and execute trades on your behalf. The advisor is compensated with a commission for each transaction. You might return to the same brokerage advisor to place additional trades and make changes in the future, but the advisor typically does not continue to advise you on an ongoing basis.
Brokerage typically makes the most sense for someone who does not plan on making many trades and does not desire ongoing advice or financial planning. Brokerage costs are typically characterized by higher up-front costs but low ongoing costs.
Advisory
Advisory is a more modern advisor-client relationship style. Picture a wealth manager who you hire to manage all your investment accounts and portfolios. When you hire your advisor in an advisory capacity, you are paying the advisor for their ongoing advice via an annual investment fee. Trading costs are also typically eliminated in an advisory relationship. Typically, an advisory relationship lasts for many years and the advisor gets to know the investor’s financial plan in great detail.
Advisory typically makes the most sense for someone who values portfolio construction and ongoing investment management. It is also a good fit for those who desire a lot of trading in their account since trading costs are typically waived. Advisory costs are typically characterized by little to no up-front costs but higher ongoing costs.
Fee For Advice
Fee for Advice is the newest advisor-client relationship style. Picture a financial counselor who you pay directly for their advice either on an hourly, monthly, or annual basis. When you hire your advisor in a fee for advice capacity, you are paying the advisor directly for their advice. Some advisors will charge monthly, or “subscription-style” and others will charge on an hourly basis. Investment and trading costs are dealt with separately. Typically, a fee for advice relationship lasts many years or as long as you are still in need of the advisor’s advice.
Fee for advice typically makes the most sense for someone who values ongoing financial advice and financial planning. It’s also a good fit for those who do not have assets to invest, prefer to invest on their own, or wants to compensate their advisor directly for advice. Fee for service costs can vary but typically the more you pay, the more attention and service you will get from your advisor.
Conclusion
I recommend you ask your advisor what relationship you have. Does it fit the type of investor you are and advisor-client relationship you want? It could be time for a change! You might have multiple relationships with the same advisor. That’s completely normal as well.
Our team at Cetera Investors can work with our clients in any of the ways explained in the article. We prefer to work with clients in whatever capacity makes them feel the most comfortable and empowered.
To discuss any of the topics discussed in this article further, schedule a meeting with Tori or myself.