Always you should ask how an advisor will get paid. Image: wavebreakmedia/Shutterstock.com
By: FEDweek StaffDo your homework before making any commitments to using a financial advisor.
Ask about an advisor’s investment philosophy, to see if it meshes with yours, and don’t judge solely by past performance. In fact, you should be wary of an advisor who starts by telling you about investment results. That might have been because of taking too many risks, with investments skewed towards hot sectors. An advisor who believes in asset allocation may not have the best results one year, but he or she won’t have the worst results the next year.
Always you should ask how an advisor will get paid. Fees that are too low may be just as dangerous as fees that are too high. An advisor has to get paid somehow so low fees may mean that the advisor’s compensation will be driven by selling you things you may not need.
* Commissions. Brokerage firms traditionally have charged sales commissions on trades. That may be cost-effective if you make few trades, which are based on the firm’s investment recommendations.
* Fees. Many brokers and investment advisors now offer to charge you fees that are based on investment assets under management. Annual fees are often in the 1-2 percent range. A firm that manages $500,000 of your money might charge $5,000-$10,000 a year.
With these fee-based accounts, you don’t pay a commission on every trade. Therefore, your broker has no incentive to churn your account and accumulate sales commissions. Instead, the advisor has an incentive to make your account grow, because the asset management fee will grow, too.
* Other arrangements. If your advisor doesn’t manage your money, an asset-based fee account won’t work. If you want comprehensive financial advice, you might pay your advisor hourly fees or an annual retainer.
If you are wary of having brokers recommend trade after trade in order to pad their compensation, one option is to trade through a discount broker. However, with a discounter you won’t get financial advice.
If you’re interested in a “fiduciary” approach, it’s vital that you work with a knowledgeable financial consultant. He or she should take the time to truly understand your goals and your risk tolerance.
In future years, the advisor should earn his or her fees by monitoring the performance of your mutual funds and money managers, suggesting changes if something goes off course. You should receive detailed quarterly reports and at least two personal meetings a year with your advisor. Get tailored advice, it’s not difficult and within reach.
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