Dear Dr. Don,
How much do financial advisers typically charge to manage your portfolio?

Thank you,
— Colleen Commission

Dear Colleen,
That’s not a simple question, unfortunately. The National Association of Personal Financial Advisors, or NAPFA, lists three different compensation models: fee-only, fee and commission, and commission.

But it gets more complicated from there. A fee-only adviser, for example, can get paid several different ways, including hourly consulting fees, a flat fee, and other models such as assets under management, or AUM, assets under advisement, or AUA, or retainer-based.

And sometimes the compensation will vary depending on how much you’re willing to invest. Under the AUM model, for example, financial advisers are compensated by a set percentage of a client’s invested assets. The more money that’s being invested, the more the client is able to negotiate a lower AUM percentage. If you’re someone who doesn’t have a high net worth, you can expect to pay anywhere from 0.25 percent to 2 percent annually for an AUM account.

NAPFA’s guide, “Pursuit of a Financial Adviser Field Guide,” can help you choose a financial adviser that’s right for you. You can download the guide for free on its website. The Certified Financial Planner Board’s website will also help you learn about financial planning. Its “Consumer Guide to Financial Self-Defense” is available as a download.

Understand the differences between a financial adviser and an investment manager. The investment manager is solely responsible for how you’re invested. The financial adviser may wear that hat along with several others, such as helping you with insurance requirements and developing a household budget.

Make sure you understand the standards your adviser is following. Financial professionals follow different standards that may impact their performance. If they follow a fiduciary standard, they must put their client’s interests first. Registered investment advisors, or RIAs, are held to a fiduciary standard. Other advisers follow a suitability standard, which means they’re required to choose investment products that are “suitable” for their clients based on the client’s investment objects and their means.

If you’d still like to hire a financial adviser, make sure the adviser tells you which standard he is being held to, and get his answer in writing.

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