Many folks are happy to take the recommendations of financial advisors. Fewer folks are happy to pay for those recommendations. But frankly, if advice is worthwhile, it’s usually worth paying for. However, before you write that check, make sure you understand what advice you’re getting and what you’re actually paying for. The financial advisors in Baton Rouge should be clear and upfront about their fees and what their services will cost. If you’re not sure about what you’re paying or to who, it’s a red flag.
This may seem simple enough, but it’s not always black-and-white.
Financial advisors can offer several pricing models. Two main ways of compensation include fees charged directly to you, and commissions earned for selling a specific product. When a commission is involved, there is a conflict of interest that can’t be ignored – when an advisor receives a kickback for recommending a product, there’s a chance that he or she may suggest the product, even if it’s not the best product for you.
What makes this even more difficult is these commissions are usually hidden and not shared up front. Have you seen the ads for “free financial advice”? While it may sound great, it’s important to understand how that advisor is being paid, because nobody works for free!
Don’t put your financial plans on the back burner. If you’re in the Baton Rouge area, contact Align Wealth Partners to see how we can help.
The professional financial advisors in Baton Rouge are investment fiduciaries , because a fiduciary is legally required to work with his or her client’s best interests first – even before his or her own! Fiduciaries are typically paid fees directly, so clients can be confident that that person is working on their behalf.
There are 4 ways many financial advisors charge fees:
- A flat consultation fee: The simplest compensation method is a flat annual retainer that covers all services. You might pay the charge all at once or in installments throughout the year.
- Hourly charge: Your advisor charges you a flat hourly fee. The fee might cover a minimum amount of time. Your advisor can track the time spent on your behalf and bills you monthly.
- Charge by service: You pay a fee for each service, which means you pay only for the services you use. For example, if you have no need for estate planning, you won’t have to pay a fee for it.
- Assets Under Management (AUM): In this method, an advisor charges you a percentage of the value of your AUM. This incentivizes your advisor to increase your AUM.
Another term to understand in financial advisor compensation is a “wrap fee.” This is a fee for a bundle of services, not a transactional fee. As defined by Rule 204-3(f), a wrap fee is a “program under which any client is charged a specified fee or fees not based directly on transactions in a client’s account for investment advisory services (which may include portfolio management or advice concerning the selection of other advisers) and execution of client transactions.”
The services covered by a wrap fee can include investment advice, financial planning, investment research and brokerage services. You don’t pay transaction commissions under a wrap-fee agreement. The flat wrap fee makes pricing transparent and easy to understand.
Wrap fees offer a couple of benefits:
- Churning: One knock on transaction-based compensation is that it encourages churn – unnecessary trading to generate commissions. Under the wrap-fee models, financial advisors have no reason to churn your investments.
- Retirement accounts: When using a wrap-fee model, you can pay for an advisor using non-retirement funds, even if the advisor renders services for retirement accounts. In a transaction-based model, commissions for retirement account trades come from the retirement account. By allowing you to pay from non-sheltered funds, wrap fees let you conserve your sheltered assets.
- Simplicity: The wrap-fee model can be easier to understand and doesn’t require monitoring transactional fees.
If a financial advisor charges wrap fees, make sure you understand:
- Expenses: It’s important to know exactly what services are included in the wrap fee. You might pay more in wrap fees than you would for separate services. Additionally, if you do little trading in your account, the fact that you don’t pay transaction commissions may not justify the wrap fee.
- Additional fees: Even if your advisor charges you a flat fee, you will have to pay additional fees if you invest in mutual funds that charge a front-end purchase fee. These typically range from 1 to 5 percent and are separate from wrap fees. In addition, most funds charge you an expense ratio that is deducted directly from the account. You may also have to pay additional fees for “trading away,” which is executing a trade using a third-party broker not covered by the wrap fee agreement.
A financial advisor may collect a commission in three ways:
- Up front, with the fee deducted from the investment amount
- On the back end, for selling the products of a financial institution
- On every purchase and sale
Full-service brokers charge more than discount brokers.
In addition to potential conflicts of interest, when an advisor is paid commissions, also be aware of churning. You must vigilantly guard against account churning, which can run up your commission expenses. If you are frequently advised to sell a recently purchased investment, consider moving your account to another advisor.
In a hybrid model, a financial advisor can offer a mix of fees and commissions. A flat fee may pay for certain services, and the commissions cover trading costs.
If an advisor uses this compensation model, watch for churning and inappropriate products (high sales fees may sway your advisor to push you into inappropriate investments, such as high-fee annuities).
What’s Best for You?
In general, the professional financial advisors in Baton Rouge, and anywhere for that matter, are investment fiduciaries. This fiduciary standard holds an advisor both legally and ethically to making decisions that are in your best interest.
In all cases, when working with a financial advisor, make sure you fully understand what you will be paying for and how much it will cost.