Fee based financial advisors are common, and are likely the type of financial advisor you would like to go with if you are completing most tasks. By providing a fixed rate you can often get more “bang-for-your-buck,” especially if you have a more complicated task. Further, a fee based advisor wont take more money, based on the more you make. In another article titled, The True Cost of a Financial Advisor, we discussed how paying 1% of your assets per year to a financial advisor costs you much more. An excerpt from the article, makes it explicitly clear:
Except… you need to take into account the returns on that investment you won’t be getting — 1% less each year. If, optimistically, your portfolio returns a 9% return each year, and we ignore taxes, after 25 years, your portfolio will be worth $862,308.
What if we take into account that 1% less each year? $684,848, or almost $200,000 dollars less.
It becomes clear that “fee based” financial advisors are often the way to go, especially when dealing with large sums of money. Below I created an image with the pros of fee based and commission based financial advisors:
Notice, the fee based financial advisors are excellent for task completion, such as your taxes. However, fee based financial advisors have the Achilles’ heel, so to speak, that their greed does not help you. Often the greed of a financial advisor with a fixed fee will harm you because they will attempt to steal or hide money. In other words, be careful with fee based financial advisors and be sure you get to know them on a somewhat personal level to ensure they do not walk away with your money.
Types of Fee Based Financial Advisors
Previously, I answered the simple question: How do financial advisors make money? In which, I described the various ways in which fee based financial advisors make money. Fee based financial advisors make money in three main ways:
- Hourly Fee: Hourly fee based financial advisors are expensive and can often cost $200 – $300 per hour. If you were to hire a financial advisor at an hourly rate, please be sure to get a “maximum quote.” Have them sign it or send it to you. By sending you a quote, you ensure that they will keep on target and if they go wildly off the quote you have some grounds to sue or to not pay. However, if you spend the time to pick the right financial advisor so this should not happen, so spend some time and shop around.
- Flat Fee: The flat fee based financial advisor is often expensive, and they will often charge more than the hourly fee financial advisors (on average). However, if you have a difficult tax return, a special circumstance for your service, etc. it may be better to hire a flat fee based financial advisor. There is next to no additional risk for hiring a flat fee financial advisor because they will contact you if they feel they are going too far above the limi (usually).
- Retainer Fee: A retainer fee based financial advisor works by paying the advisor upfront. The fee is always prior to services rendered and quite often can be a percentage of the funds they are going to manage or be in proportion to services. Retainer fee based financial advisors are often quite expensive, and have a mild amount of risk, having already taken your money they can perform a sub-par job and you have little recourse. Ensure that you hire the “correct” financial advisor for you by properly vetting the financial advisor.