By: Laura Walton AFC®
No, no, I don’t mean you personally. Instead, this is the most important question you can and should ask a financial professional. But, we’re reluctant to do so. It almost feels impolite in the same way as asking “how much do you make?” feels.
It helps to keep in mind that you’re paying for a service; that service is financial advice. We’re used to paying for services and often get estimates of costs before we proceed. Financial advice shouldn’t be the exception.
When asked, the financial professional will typically answer in one of three ways – fee only, fee based, or commission only.
Fee only advisers accept no sales or trading commissions. They typically charge a fee that is a percentage of the assets they manage for you. Some may charge an hourly fee or you can pay upfront for a one-time financial plan. You will get an invoice.
Fee based advisers will charge a fee plus earn commissions on the sale of products or trades. These commissions can be added to their fee (fee plus) or subtracted (fee offset).
Commissioned advisers earn commissions on the sale of products or by trading. An adviser’s commission may be built into the price of a product you buy, for example, an annuity. If asked, the adviser must disclose his sales commission on a product. The commission you pay for trading will appear on your account statement.
This information can be verified by reading the adviser’s Form ADV at the Investment Adviser Public Disclosure (IAPD) website. Form ADV consists of two parts. Part 1 contains information about the adviser’s business and whether they’ve had problems with regulators or clients. Part 2 outlines the adviser’s services, fees, and strategies. And, for more general information, I encourage you to visit the SEC’s website page titled “Investment Advisers: What You Need to Know Before Choosing One.”
There are arguments both for and against each of these fee models and whether one benefits you more than another depends on your personal situation. That said, if you don’t know how you are paying for advice, you are buying a service with your eyes closed and what seems like free advice is likely not. A good adviser will respect your question, “how do you get paid?” – don’t hesitate to ask.