5. Find out how the adviser gets paidWhether it is commissions, fees or a percentage of assets under management, the adviser is paid for advice. Understanding how -- and how much -- an adviser is paid is an important part of establishing this relationship.
Always consider whether a planner's compensation requirements will interfere with his objectivity. Is he selling you a product because it's a good product for you or because he gets a larger commission on it? Some commission-based advisers associated with institutions such as brokerage firms or banks might have a quota they need to fill in order to keep their jobs, and the products they're pushing might not be the best for you.
If your adviser, broker or planner gets paid a commission, it does not necessarily mean that he or she isn't looking out for your best interests. But the potential for a conflict of interest is greater. With that in mind, don't be afraid to ask how much the planner is making off a product sale.
Fee structures for financial advisers:
- Commission-based. Many financial planners earn income through commissions on sales of products, such as stocks, bonds and mutual funds. This model has the weakness of requiring you to be sold something to compensate the planner for his or her time.
- Combination of commissions and fees. Some planners not only earn commissions from the sale of products but charge a flat fee, or a fee based on a percentage of the assets they manage. The flat fees can range from $500 to $5,000 annually.
- Fee-only advisers. These advisers do not take commissions, but instead charge either set fees or asset-based fees. Asset-based fees are typically on a sliding scale, with larger accounts paying a smaller percentage of the assets under management. Small accounts are often discouraged through a minimum annual fee. The percentage charged varies from company to company and region to region. A typical fee-based arrangement might be 1 percent of the first million dollars of assets under management, 0.75 percent of $1,000,001 to $2 million, and 0.5 percent for everything over $2 million.
- Hourly. This option is not as common for a long-term investment relationship. 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.
Lastly, don't forget about personality. Just as equally qualified doctors can have different bedside manners, so can financial advisers. Make sure that you feel comfortable with the way an adviser explains things to you. After all, it's your money.