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 Dear
Dr. Don,
Is there a standard range of fee rates, based on the amount of money managed, that a financial planner charges?
-- Dick Differential
 Dear
Dick,
There are four basic compensation models for financial planners:
assets under management (AUM), an hourly or set fee for work performed, a retainer
model or a commission based model. There's not one right model for everyone,
so the goal is to find the model that's right for you.
An asset
under management model has the financial planner receiving a percentage of the
wealth he or she manages for you. The percentage fee is typically on a sliding
scale with larger accounts paying a smaller percentage of AUM. Small accounts
are often discouraged through a minimum annual fee. Here is an example of
a sliding scale fee structure: Assets-Under-Management
fee structure: Yearly fee of 1.5 percent for AUM under $500,000, 1.25 percent
for AUM between $500,000 and $1,000,000, and 1 percent for AUM over $1,000,000. One
problem with the AUM model is it encourages planners to try to hold on to assets. Paying
cash for that second home by liquidating part of the portfolio could be discouraged. An
hourly fee model has you paying for the time the planner spends on your account.
Hourly rates vary but expect to pay $150 to $300 per hour for basic financial
planning. The Garrett
Planning Network has made this method of payment its niche in providing financial
services but you can also find fee-only financial advisers using the National
Association of Personal Financial Advisors (NAPFA)
site. The retainer model is the up and coming approach to
paying for financial planning. The planner charges you a flat fee and for
that fee you receive an agreed upon level of service over the contract period. This
model, like the hourly fee model, avoids most conflicts of interest. Finally,
the commission based model has the planner compensated based on money he or she
receives as payment for selling you financial instruments like stocks, bonds,
mutual funds, insurance, limited partnerships, etc. This model has the weakness
of requiring you to be sold something for the planner to be compensated for his
or her time. I urge you to read "The
Future of Fees" by Nancy Opiela writing for the Journal of Financial
Planning in its August 2006 issue for additional depth on this topic. One
good rule: don't pay 1.5 percent AUM to invest in a mutual fund that charges 1.5
percent management fees. Paying 3 percent to invest in a mutual fund makes
it hard for your wealth to grow. Not to denigrate the advice
I've provided here, but you should expect to pay for sound financial advice. But
you also get to choose how you pay for that advice. | 
