Choosing an Advisor
Zoe Team
5 min read
The best payment method depends on your unique financial complexity, goals, and the type of advice you require.
Understand the differences between fee-only, commission-based, and flat-fee models to choose an advisor whose incentives align with your interests.
Prioritize transparency in fee structures to ensure you understand exactly what you are paying for and how it impacts your total return.
Advisors typically charge through AUM fees (percentage of assets managed), flat or hourly fees, or commissions on products sold, each with different incentives.
One-time fees work well for specific project-based planning, while yearly or AUM fees are often better for ongoing management and relationship-based advisory services.
Look for transparency regarding all costs, ensure the services provided match the complexity of your needs, and confirm the advisor acts in your best interest.
In this article: Deciding how to pay your financial advisor can be confusing. Is a one-time fee or yearly fee best for your unique situation? It depends!
Deciding how to pay your advisor boils down to trust. Financial advisors are often given a bad rap, and for good reason - many do not have their client’s best interest at heart. There are plenty of financial advisors who have to meet quotas of products they recommend when providing financial advice. Complicating this perception further are the many insurance companies who glorify their salespeople, branding them as ‘financial advisors’ who sell expensive services or products investors don’t really need. In order for a financial advisor to be a fiduciary (like those in the Zoe network), and live up to the name, they need to act in their client’s best interest. The best way to ensure that they are on “your side of the table” is by checking if the advisor receives any commissions or kickbacks from the products they recommend. Once you’re certain your financial advisor is a fiduciary, the most asked question is: What is the best way to pay your advisor? There are three main pricing structures: assets under management, ongoing flat-fee, and a one-time fee. You can start by evaluating what services you’re looking for.
For one-time services, advisors usually charge a set fee per hour. Your final cost will depend on the level of the advisor’s experience as well as on how complex your particular situation is. As a result, the final cost range can vary anywhere between $1200-$5000. If a client decides that they require ongoing or intermittent support aside from the financial plan, hiring an advisor by the hour can become costly.
One benefit that the one-time service option provides for more autonomous investors is the liberty to execute themselves the advice offered by their financial advisor. The downfall to this is that you will have to allocate your own time to execute the plan. This can be quite time consuming and anxiety-inducing.
Under the assets under management (AUM) fee structure, financial advisors are hired to manage their clients’ assets and make financial management decisions on their behalf. This option provides both comprehensive financial planning as well as the implementation of investment management of a client’s assets. Advisors are expected to construct financial plans, facilitate and conserve account structures, monitor account evolvement, provide continual advice, and alter financial plans according to changing client objectives. The advisor also creates a customized investment allocation that aligns with their stated risk profile and specific goals.
The implementation and maintenance of the portfolio includes trading, rebalancing, and tax-loss harvesting throughout the year. When executed well, these tasks can save the client thousands of dollars a year which would more than cover the cost of the service. The annual advisory fees vary significantly from 0.5% to 1.5% depending on all the services provided as well as on the balance of the portfolio they manage on your behalf. Keep in mind these fees are negotiable.
Committing to an annual financial advisor fee is advantageous for many, particularly when the long-term benefits are considered. Given the ability to adapt the yearly plan to evolve with a client’s short and long-term goals, an annually paid advisor is guaranteed to be highly invested in achieving growth potential and reducing losses for their client.
So why should a client choose an ongoing flat or AUM fee rather than seek a one-time service? The world revolves around incentives. Hiring an advisor on an on-going basis places “more skin in the game” for the advisor on their recommendations as they are going to be accountable when it comes time to see the results. No better way to build trust than turn a relationship from a one time transaction to an going relationship
The success of a client-advisor relationship lies in the advisor’s ability to effectively adapt and respond to client goal changes and unprecedented market shifts. Furthermore, an advisor contracted annually will take the time to think through long-term client objectives such as saving thoughtfully towards your child’s higher education or your dream retirement. Conversely, with one-off services, weeks or months might pass without client-advisor contact, leaving the advisor unable to manage the client’s finances and objectives and/or market changes appropriately. Understanding the client, building a prosperous relationship ensures that objectives are aligned.
Perceptions about financial advisors are changing, moving from a profession viewed as brokers selling a product to a trusted partner that can provide sound advice. According to the U.S Labor of Statistics, personal financial advisors are “projected to grow 7 percent from 2018 to 2028, faster than the average for all occupations. As the population ages and life expectancies rise, demand for financial planning services should increase”. Understanding advisor services, functions, plans, and costs is essential for the industry to gain trust. A one-time service is appealing due to the short term commitment and cost, yet the personal and relationship-building components are very much absent. Whereas hiring a commission-free fiduciary financial advisor under an AUM pricing model is an investment in itself, as you develop a financially prosperous relationship based on trust.
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