A Guide to Financial Advisor Fee Structures

Find out which fee structure is compatible with your goals.

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If you understand your advisor's fee structure, you will understand more about their responsibilities toward you.

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How is this financial advisor paid for helping me?

The answers you collect in response to this simple, straightforward question are essential for choosing the advisor who is best for you. It is not always an easy question to ask, and the answer is not always clear.

It can be awkward to foray into questions about the advisor’s business model, commissions, fees and other details, but how the advisor handles this conversation will clue you in to the advisor’s qualifications and communication style. Preparing for this conversation can help you clarify your own financial goals and the type of help you need to accomplish them.

“Fiduciary” and “suitability” are the two standards of advisors' accountability to clients. Fee structures pivot on one point: Who comes first when the advisor makes recommendations: you or the advisor?

In financial terminology, the type of responsibility an advisor has to clients is either fiduciary or suitability, says Mark Gilbert, an advisor at Reason Financial Advisors, Inc., of Northbrook, Ill.

A fiduciary has the highest level of accountability to you, the client. A fiduciary advisor must make recommendations that are best for you, even if those recommendations result in less income for him or her. Here are three types of fiduciaries you may come across when searching for a financial advisor:

  • CFP: A common certification for a fiduciary is certified financial planner.
  • NAPFA: Members of the National Association of Personal Financial Advisors renew an annual oath to their fiduciary standard. They charge fees and do not take commissions.
  • CPA PFS: Many certified public accountants have expanded into financial advising. They can earn a personal financial specialist designation. The fiduciary expectations for these advisors are currently being finalized by the American Institute of Certified Public Accountants.

Fiduciary advisors are paid by any of these three modes: an hourly fee, fees based on gains in the investments they manage on your behalf and a combination of fees and commissions. The latter means that fees may be minimal or contingent on portfolio performance, or on the number and size of transactions you make. That means it is possible for a fiduciary advisor to be compensated in part through commissions. Commissions do not necessarily contradict the fiduciary responsibility.

Suitability is a lower standard, and it means that the advisor must make recommendations that are appropriate for you, the client, at that time, Gilbert says. Under the suitability standard, the advisor isn't under any obligation to remind you to, say, sell a stock if it reaches a certain value, or adjust your portfolio. Often, advisors operating under the suitability standard are commission-based, and their main interest is selling you something: stocks, bonds, mutual funds, annuities, real estate, insurance or other financial tools.

Many professional organizations offer training and certification in financial advisory skills, resulting in designations that sound nearly like the CFP. For example, the insurance industry offers a chartered financial consultant designation, which lets insurance agents earn a minimum level of competency in investment advisory. Quickly sort through the welter of certifications with the handy acronym decoder provided by the Financial Industry Regulatory Authority.

Although the many certifications can sound the same, they usually result in real-world differences in client experience. For example, financial advisors with fiduciary responsibility meet with clients an average of at least two times before making investment recommendations, according to 2012 research by the University of Georgia Department of Financial Planning, Housing and Consumer Economics.

But the same study found that “registered representatives," or stockbrokers, who hew to the suitability standard, typically made investment recommendations in the first meeting with a new client.

What fee structure is compatible with your goals? Some planners require that new clients bring large portfolios for them to manage. Minimum thresholds can be $500,000 or more, says Delia Fernandez, a certified financial planner and fee-only advisor based in Los Alamitos, Calif.

It can be tempting to take advice from an advisor under the suitability standard because that’s what you can afford. But because these advisors are only required to recommend what’s right for you in the moment, for what they are qualified to sell (such as mutual funds, stocks or insurance), you probably won’t get comprehensive advice from them, Fernandez says.

Before you approach advisors, figure out what type of financial help you actually need, she recommends. “What are your goals? What do you want money for?” she asks clients to consider.

Many people mainly want investment advice, and fully expect to pay a fee or commission to buy stocks or mutual funds. If you are comfortable with, say, your level of life insurance and other basics, it’s fine to prioritize your investment goals and work with an investment advisor under the suitability standard.

“A commissioned agent can provide you with an entree to the investment world in a way that is a good starting point,” Fernandez says. “But for looking at overall growth and for making plans for the long run, consider a fiduciary advisor. For $100 to $300 an hour, you can talk with someone who can touch on many aspects of your financial life and make recommendations.”

How to open the conversation. It can be awkward to ask directly about fees when first getting acquainted, so ease into the question by asking about fiduciary responsibility, suggests Stephen Barnes of Barnes Investment Advisory Inc., in Phoenix.

“If the advisor will not take fiduciary responsibility, it’s because it’s not their business model,” he says. “If you want the advisor to be a fiduciary, ask the advisor to put in writing that this is a fiduciary responsibility.”

That agreement could be in the form of the basic contract with the advisor, or it could be a separate letter.

If the advisor agrees to fiduciary responsibility, you can ask about the fee structure. Barnes recommends covering these points:

  • Any commissions the advisor might get by also executing transactions
  • Ongoing fees for any investments the advisor might make on your behalf
  • Referral fees the advisor might capture by referring you to agents and brokers
  • Request a sample statement so you can see how the fees and/or commissions affect net results.
In the end, Fernandez says, the decision pivots on whether you prefer to pay a fee or a slice of asset growth to have a comprehensive planner who puts you first, or if you are comfortable with a mix of advisors and fee structures. “You do have to decide,” she says, “How much of this you can do yourself and how much guidance and hand-holding you want.”