5 Costs to think about when hiring a Financial Advisor


When you are deciding if the time to recruit a financial advisor is right now, the bottom line will not always be what you would expect from the outset.

There is an assortment of costs and fees that you may not know about, but you should definitely be aware of before you make your decision.

Read on for more information on the 5 actual costs when hiring a financial advisor.

1. Asset under management and Fee based Payment arrangements


If you have a portfolio with a large amount of assets, in certain circumstances it may be more expensive.

A raising fee structure is called Assets Under Management (AUM), for financial advisors.

The financial advisor gets a percentage of the amount of money that they manage for you under an AUM fee structure, traditionally 1 per cent.

Through these measures, investors who are compensated through an asset management strategy gain only their income.

This will definitely add up, but you and your counselor will build a good working relationship.

Fee-based financial advisors have good incentives to use your money to make safe, strategic decisions, so you know you’re going to work as a team.

2. Commission based payment

Often investors more inclined to push the envelope go with a commission-based advisor.

Under these types of schemes the initial cost is small and only a bonus is paid to financial advisors depending on the overall earnings.

This also seems to be an enticing situation, but can be dangerous.

Commission-based advisors are also more likely to take risks that flat fee-based advisors will not take on the investment portfolio.

You may also be more likely to promote other forms of financial products which may not be the best choice for your needs.

Over the long run, having a cheaper alternative can be better than going with a commission-based financial planner.

3. Advisor Compensation

Another possible pitfall for a non-fee-based financial advisor concerns the other parties from whom they might be receiving their commissions.

Some financial advisors may be receiving their compensation from larger investment banks or brokerage firms, often stationed at a local community bank.

It might be “free advice,” but may not be their ultimate goal for your best interests.

Many financial advisors operate on an incentive compensation plan which could jeopardize your priorities.

Always be sure to ask who they are working for exactly, and how they get their commission.

4. Expect additional fees

Make sure you read the fine print in any deal you have with a financial advisor.

You could be on the hook for additional charges. You may even have to pay third-party fees, in addition to paying the financial advisor.

This is often the case if your financial advisor as part of your investment portfolio uses mutual funds or exchange-traded funds.

These costs can add up, and can range in the hundreds of thousands of dollars with mutual funds.

Always ensure that you are aware of any additional fees you may be obliged to pay under the terms of your agreement.

5. Using a robo advisor

In recent years, using a robo-advisor has become a far more popular, cheaper option.

Robo-advisors, who also use an AUM arrangement, charge significantly less than in-person services.

Its flat fee is usually between 0.25 and 0.5 percent.

Recent studies also show a bias among most investors for robo-advisors.

The algorithms used by robo-advisors, however, are largely untested as they only existed during the stronger markets that emerged following the collapse of 2008.

The upfront cost is certainly a plus, but with the increasing uncertainty of the current economy, using a robo-advisor during a volatile market may not be the safest option.

In summary

Whatever avenue you choose when selecting a financial advisor, you should always be very careful to be on the lookout for unforeseen costs.

You should ask several financial planner questions about their compensation before hiring an adviser.

Whether it is a flat-fee or a commission-based payment arrangement, you should always ensure that the best interests of your financial advisor are aligned with your own. Be sure to read the fine print and look out for additional fees.

And if you want to go with a robo-advisor, be sure to be careful in the volatile market this year.

Otherwise, when hiring a financial advisor, you might be caught off guard by the 5 actual costs.

Komolafe Timileyin is a passionate entrepreneur that loves to solve entrepreneurial issues. He is also a blogger and an upcoming Engineer.

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