Last week, we discussed the different types of financial advisers.
Today: What should you ask your money pro first? Answer: You need to know what they’re charging you, so you can keep your investing costs low.
Here are some common fee structures. Note that you pay these on top of investing fees (i.e. expense ratios, loads, 12b-1 fees, etc.). The phrase to use: What are my all-in costs? And ask to see a breakdown.
Commission-based: The adviser takes a commission based on the investments they sell to you.
Pros: If the adviser sells you fund X, that company pays the commission, not you.
Cons: The adviser has an incentive to sell you funds with the biggest payoff for him or her, not you. Not that they will.
Asset-based: The adviser charges a percentage of your assets under management (AUM), generally between .05%-2.0%.
Pros: It’s a flat rate, and you can keep track of what you’re paying.
Cons: The percentages look small, but run the numbers. If you have a $50,000 portfolio, a 1% fee is $500 a year.
Fee only: You pay a flat consultation fee or hourly rate, like going to the doctor.
Pros: A la carte fees generally take a smaller bite from your returns. And the adviser’s incentive is to keep you happy, not sell you pricey funds.
Cons: “Fee only” is a vague term that anyone can use, so be sure to ask a “fee-only planner” what that means.