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How Should You Pay Your Wealth Advisor?

Mark Smith, CFP®, CPA/PFS, CIMA® - Thursday, August 24, 2017

How Should You Pay Your Wealth Advisor | M.J. Smith & AssociatesFinancial advisor compensation has been a hot topic in our industry for many years, and it is also on the minds of cost-conscious investors seeking access to high-quality financial advice. Numerous articles coach consumers to ask questions before engaging an advisor, and often, those questions include: “How do you charge for your services, and how much?” In this blog, I would like to address the many ways advisors get paid, and provide you some insight into how and why M.J. Smith & Associates charges for its services. I’ll also explain why you should look at more than just compensation models when hiring an advisor.

 

Most Popular Compensation Models

The three most popular methods of advisor charging include commissions, a fee-based model, or a fee-only model. Each method offers both pros and cons for investors.

Commissions: Advisors who receive payment by commission are often securities, mutual fund or insurance brokers. Though they may have the title of “advisor,” often these financial professionals are sales people, whose only advice to you may concern which product to choose from among a universe of suitable products. This method of remuneration is most prone to conflicts of interest. Those could include recommending a product that pays the advisor a higher commission, even if a similar, less expensive product is available. It could also involve excessive trading, when an advisor receives compensation based on generating transactions.

Fee-Only: Fee-only advisors are more likely to be Registered Investment Advisers, or RIAs, who must adhere to a fiduciary standard of care when working with clients. Fee-only advisors may receive hourly fees, a flat fee, or a retainer. While this may be the easiest compensation model for consumers to understand, and it’s one that many ethical advisors offer, it also can include some inherent problems. For example, advisors who charge by the hour, will, in all likelihood, charge for all time entered on behalf of a client – from making copies, to taking phone calls and actually administering advice. In the first year, especially, clients may receive large invoices because of the time involved in setting up advisory arrangement. That may make some clients feel gun-shy about asking for help or advice for fear of incurring additional hourly fees.

Small firms with just one or two advisors may offer advice for a flat fee. Often these fees are lower than what a larger, full-service, fee-based firm may charge. On the positive side, a client typically won’t receive a surprisingly large invoice, and he or she may feel free to contact the advisor as often as necessary to get advice on complex financial matters. However, smaller advisor operations may have few support staff, meaning the lead advisor is also the person washing the coffee mugs and taking out the trash each night. That leaves less time for concentrating on client work. While the price may seem attractive on the front end, the old saying, “You get what you pay for,” applies here, since, in my opinion, you may receive a much lower level of service.

Fee-based: Fee-based advisors are also likely to be RIAs, so they also must adhere to a fiduciary standardIn this case, advisors may charge a fee to create a holistic financial plan for a client, and then manage the investment portion of that plan for a percentage of the client’s assets under management (AUM). The advisor may also receive commissions based on the client’s investments, but the client makes the ultimate decision as to the types of investment products he or she wants to buy. Dual registration (as an advisor and a broker) can be confusing to consumers because the standard of care for each function is different (fiduciary vs. suitability), and investors may not know when their advisors is “switching hats.”

 

How M.J. Smith and Associates Charges Clients

M.J. Smith and Associates is a fee-based advisory firm, and we are fiduciaries. We provide holistic financial plans to clients, including asset allocation/portfolio evaluation, income tax planning, estate planning, risk management and retirement planning, as well as behavioral coaching, for a fee of approximately $3,000. (We will provide a written engagement letter before we create the plan, and the fee may be more or less depending on the complexity of the client’s situation.) For ongoing investment management, we charge a percentage of AUM on a sliding scale, based on the client’s asset total. (Our highest AUM fee is 1%, for assets ranging from $500,000 to $1 million, and we offer much lower rates as the asset size increases, or in situations where clients want a lower service level.) Clients also will incur internal expenses charged by mutual funds and other investment company securities. For details on all of our charges, please read Part 2A of our Form ADV, which is on file with the Securities and Exchange Commission.

To our firm, charging a percentage of AUM makes sense, because asset growth means a win-win for both us and the client. As the client makes more money, we make more money. If an asset underperforms, we have the incentive to move the asset out of the portfolio, where a flat-fee advisor makes less money if he or she has to do more work to manage the account.

 

Other Considerations

While it’s tempting just to look at expenses when choosing an advisory firm, there’s really more to the story. In addition to compensation, investors should look at an advisor’s credentials, experience, and track record of complaints. The Financial Industry Regulatory Authority (FINRA) offers a website that helps consumers understand how robust their advisor’s professional designations are, and a website that lets consumers check for complaints against an advisor.

Credentials help consumers understand their advisor’s level of competence. Our advisors’ credentials include Certified Public Accountant/Personal Financial Specialist (offered through AICPA), Chartered Financial Analyst (offered through the CFA Institute), Certified Investment Management Analyst® (offered by IMCA), and the globally recognized CERTIFIED FINANCIAL PLANNER™ certification (offered by CFP Board). Those who obtain CFP certification must voluntarily commit to placing their clients’ interests first.

Finally, consider experience. I started M.J. Smith & Associates in 1983, and collectively, our advisors have decades of experience working with clients.

 

Parting Thoughts

If you made it to this paragraph, congratulations! I hope you now have a better understanding of the complex nature of financial advisory engagements! We believe it’s important to communicate our fees with full transparency, and doing so involves providing you with the necessary context to evaluate our firm. If you have any questions, or would like to set up a complimentary, no-obligation portfolio review, please feel free to contact us. It’s our privilege to serve you.

 

 

This information does not purport to be a complete description of the advisor compensation models referenced; it has been obtained from sources considered to be reliable but its accuracy cannot be guaranteed. Opinions expressed are those of Mark Smith and are not necessarily those of Raymond James. In deciding to pay a fee rather than commissions, clients should understand that the fee may be higher than a commission alternative during periods

of lower trading. Clients should periodically re-evaluate whether the use of an asset-based fee continues to be appropriate in servicing their needs. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

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