Some financial planners charge fees in the form of commissions; others in the form of an hourly rate, and others as a percentage of your account value.
What does that mean to you?
It means a financial planning fee can vary tremendously from planner to planner, so you want to know what to look for. Here are the six types of financial planning fees you may encounter.1. Commissions Paid To The Financial Planner
This is the most common financial planner fee you will encounter. Some commission based financial planners provide quality advice; some are just good salespeople. Any time you pay a commission there is the potential that the advice you receive could be influenced by how much the person will make on one product verses another.
How Does This Financial Planner Fee Work?
Commissions can take the form of a front end sales load charged on a mutual fund, a surrender charge on an annuity, or commissions which may be paid directly to the financial planner from the sale of an insurance product.
There is nothing wrong with paying a commission. The important thing is to work with someone who offers a clear explanation of how they are paid. They should feel comfortable telling you how much they will receive if you buy the investments or insurance products they recommend. If they seem reluctant to answer this question, move on.
This is also one of the most common ways that a financial planner will receive fees.
When you hire a financial planner who is compensated in this way, it is important to understand if they are providing investment management and financial planning, or just investment management. Expect to pay a slightly higher financial planner fee if they are providing full service financial planning along with investment management.
You will also want to ask a financial planner who charges in this way if they are fee-only or fee-based. Fee-only advisors are more likely to use low cost funds in your account, minimizing the overall expenses you will pay.
How Does The Fee Work?
A financial planner who works this way will charge a fee based on a percentage of your account value. If your account value grows, they will make more money. If your account value goes down, they will make less money. In this way they have an incentive to grow your account and to minimize losses.
This type of fee can range from 2.5% per year on the high side to .50% per year on the low side. Typically the more assets you have, the lower the fee.
- 6 Investment Fees To Ask About Before You Invest
- What Will A Good Investment Advisor Do For Me?
- What Will A Good Financial Planner Do For Me?
Many financial planners today can collect fees and commissions in both ways described above. They often use the term fee-based. It is important to understand the difference between a fee-only financial planner, and a fee-based financial planner.
This can be a great way to pay for financial advice if you are willing to implement the advice on your own. For example, you may pay a financial planner an hourly fee to tell you how to allocate the investments in your 401k plan. Then you would be responsible for actually making the changes they recommend.
How Does This Type Of Financial Planning Fee Work?
Just like attorneys, or accountants, hourly rates will vary widely from planner to planner. Expect to pay a higher hourly rate for experienced financial planners, or planners who have an area of specialty. Lower rates will be charged by less experienced planners. Hourly rates can vary from $75 an hour to well over $300 per hour.
When you need a project completed, such as an initial retirement plan projection, or an analysis of the purchase of an investment property, it may make sense to pay a flat fee to have someone crunch the numbers for you and lay out various courses of action, along with pros and cons.
How Does This Type Of Financial Planning Fee Work?
Since a flat financial planning fee is not tied to the value of investments, or generated by the purchase of any specific investment, you can feel confident you will receive objective advice.
A flat financial planning fee should be quoted upfront, along with a clear description of what type of service or analysis will be provided. Ask if follow up meetings, phone time and/or email questions are included.6. A Quarterly Or Annual Retainer Fee to Provide Ongoing Financial Planning
If you have a more complex situation then you may benefit from paying for ongoing financial planning advice in the form a quarterly or annual retainer fee.
How Does This Type Of Financial Planner Fee Work?
Since a retainer fee is not tied to the value of investments, or generated by the purchase of any specific investment, you can feel confident you will receive objective advice.
After learning about the complexity of your situation, a financial planner can tell you what your quarterly or annual retainer fee would be, and what services are included for that fee. A written contract detailing the fee and services is usually provided. Financial planning retainer fees may vary from $2,000 per year to over $20,000 per year for high net worth individuals.
Always ask a financial planner for a clear explanation of how they are compensated. If you don't understand how someone makes their money, then don't buy from them.