How Your Financial Advisor Gets Paid - 3 Types of Wealth Management Fees

How Your Financial Advisor Gets Paid - 3 Types of Wealth Management Fees

The way a financial advisor is paid can tell you a lot about their motives, and what kind of support to expect. At best, it can reassure you, letting you know that your interests are aligned. At worst, however, it can set you up for financial missteps, providing incentives for your advisor to push you towards a financial plan that doesn’t suit your needs. And that will cost you in both the short- and long-term.

If you’re looking for a financial advisor, there are three common types of wealth management fees you should know: 

• Asset-based fees
• Flat fees
• Commission-based fees
  

Here’s how each fee structure works, so you can choose the right financial advisor for you and your goals.

Asset-based fees

Asset-based fees are charged as a percentage of your investment account that’s being managed by the advisor, often on a sliding scale. The more your account is worth, the lower the percentage fee you’d pay. Because higher assets tend to go along with more complex finances, asset-based fees can give you more value for your money as you build wealth. Advisors usually deduct the fee from your account on a quarterly or monthly basis. So, no need to worry about cutting a check.

This fee structure is generally aligned with your best interests - your financial advisor earns more as your portfolio grows. This means they’re motivated to help you grow your assets. There are some caveats in that there's no incentive for an advisor to advise you to spend money or hold investments outside the portfolio that he or she manages, but many advisors that charge asset-based fees are fiduciaries, which creates a legal imperative to help you make the optimal choices, somewhat mitigating those risks.

Here are average fees for financial planners who use an asset-based fee structure, according to a 2020 survey:

• 1.0% up to $1 million ($10,000)
• 0.9% at $2 million ($18,000)
• 0.8% at $5 million ($40,000)
  

The bottom line on asset-based fees: For high earners who have increasingly complex finances and prefer to work one-on-one with their financial advisor, an asset-based fee structure is a great option.

Flat fees

Flat-fee advisors charge a fixed amount, usually on a quarterly or annual basis. Unlike an asset-based fee, a flat fee stays the same regardless of how much your assets grow. This amount is based on the complexity of your finances, so the simpler the job, the lower the fee.

Flat fees typically only cover your financial plan — not necessarily the implementation of the plan. You’d typically need to be willing to take a hands-on approach with your finances if you choose an advisor who uses this fee structure. 

There are also financial advisors who instead offer a mix of a flat fee and a commission-based fees (which we’ll go over in the next section.) So it’s important to hone in on the language to understand what you’re getting, and ask the right questions when looking for a financial planner.

The median annual fee for a financial plan using this fee structure is around $2,500, while an ongoing retainer can average upwards of another $4,000. As you can tell, the cost can range widely depending on the complexity of your finances and the advisor you work with. It’s a good idea to shop around if you’re considering an advisor who uses this fee structure.

The bottom line on flat fees: In general, flat-fee advisors are best suited to someone who doesn’t have complex finances and is comfortable carrying out a financial plan themselves.

Commission-based fees

Under a commission-based fee structure, advisors are paid based on the products they sell you, typically ranging from 3% to 6% of the overall cost. These fees are common at traditional brokerage firms and big banks like Edward Jones and Merrill Lynch.

The challenge with commission-based fees is the misalignment of incentives between the advisor and you, the client. An advisor who gets paid on commission might be more inclined to recommend investments or products that have a higher commission attached (like complex life insurance policies or mutual funds), even if these aren't the best option for you. This kind of fee has also been associated with churning, another unethical practice where an advisor excessively trades securities as a way to earn more commissions.

Of course there are commission-based financial advisors who put their clients’ needs first. But the potential for misaligned incentives is something to be aware of when you’re interviewing advisors. 

As mentioned earlier, commissions can be combined with other fee structures, including asset-based and flat fees. This is why it’s important to ask a lot of questions when first meeting with advisors to avoid financial missteps and make the most of the client-advisor relationship.

The bottom line on commission-based fees: In general, we recommend most people avoid commission-based fee structures to ensure you’re getting the best quality and advice for your money.

How does Farther fit in?

Farther uses a transparent asset-based fee structure with a sliding scale, and all of our advisors are fiduciaries, meaning they’re legally required to act in your best interest. There are no hidden fees or commissions, and each client has a dedicated advisor. If you’re looking to work with a financial advisor to grow long-term wealth and make a plan that matches your goals, we’re here to help.

Schedule a call with a Farther advisor to explore our modern approach to wealth management.