Financial Advisors: Who They Are & What They Cost
I recently came across a great article on Forbes that explains the differences between financial advisors, and unfortunately I think this causes a lot of angst and distrust among new investors. After all, you are entrusting these people with your money (a.k.a. your life) and all that you have worked for, so it pays to be very skeptical about who you choose; in fact you have every right to be picky.
In order to avoid more headaches (you have enough on your plate!) I decided that today I would explain the differences between financial adviors and for the most part there are two of each kind...choose at your own discretion of course.
There are 2 basic types of advisors:
Broker Dealers - these are sales people in that they get paid commissions for what securities (stocks, funds, bonds, etc.) that they sell to you. Despite the fact that there is an apparent conflict of interest and they legally do not need to have your best interest in mind, most broker dealers know that they must act justly in order to attract and retain clients. They outnumber RIAs 4:1 yet most have great training and have good intentions, despite what the news says. Yet, if you are really worried about trust, it might help to avoid all potential bad apples.
Registered Investment Advisors (RIAs) - these guys do not get paid commission for selling stocks to you. Instead, they are paid a flat fee by the hour or a flat fee based on what kind of investments you're looking to buy. RIAs can obviously avoid conflict of interest since they don't get commissions for selling you something that's potentially garbage. These individuals are "fiduciaries" because they adhere to stricter rules on dealing with clients. Among these advisors, there are two subcategories.
Self Directed - These advisors promote the do-it-yourself mentality and allow their clients to manage their own money while providing a "look over the shoulder" to give guidance and opinions to help their clients make decisions. A flat fee to examine services usually requires that investors pay a flat fee of around $1,000 to examine a client's portfolio and suggest changes. They may also charge an hourly rate to help form a financial plan which usually costs about $250 to $500 per hour, but some will charge as much at $3,000 to $5,000 per hour.
Deputizers - If you are an investor who wants someone else to run your portfolio, then it might be best for you to turn over your control to this adviser. However, you have to pay a pretty penny for this service. Deputizers tend to pay a certain portion of their assets to an advisor and trust that they will make the correct choices. These can end up being about 0.75% to 1.5% fees on an annual basis, and over time that adds up. For example, if you have a portfolio of $1 million, this means the advisor pockets $10,000 each year just from you. The more assets you possess, the lower the percentage the advisor gets, yet this just means they will earn just as much from average people as they do from rich people.
So what are the appropriate questions to ask? We will discuss this topic next week.
In the meantime, GRADMONEY can help take care of this discrepancy at a fraction of the price. Learn more here!