Investment advisors, brokers, investment managers, and financial advisors do get paid. It sounds like a silly statement. Of course they get paid. They’re in business to earn a living. The funny thing is most people don’t know how their advisor is getting paid nor do they know how much they are paying him/her. In a recent conversation, a friend who has been relying on a broker to help him manage his investments, blurted out, “I don’t pay my advisor anything”. He’s a bright guy, so as soon as his words made it back to his ears he looked like a deer caught in the headlights…. stunned and perplexed. Today I met with a woman who had no clue she had just signed on with an investment advisor who was charging her 1.5% annually to manage a portfolio of mutual funds. In addition, a clause in the agreement stated if she left in the first 12 months the firm would charge her 2 quarters of investment fees or $1,425. The point is, you as an investor have the responsibility to read the agreement and point-blank ask your advisor how they get paid. Most advisors are happy to share that information with you. If they’re not, it’s better you find someone who is. Open communication is necessary to have a good long term relationship.
How do investment advisers get paid? This is the Securities and Exchange’s (SEC’s) answer found at http://www.sec.gov/investor/pubs/invadvisers.htm
A: Before you hire any financial professional—whether it’s a stockbroker, a financial planner, or an investment adviser—you should always find out and make sure you understand how that person gets paid. Investment advisers generally are paid in any of the following ways:
- A percentage of the value of the assets they manage for you;
- An hourly fee for the time they spend working for you;
- A fixed fee;
- A commission on the securities they sell; or
- Some combination of the above.
I’ll describe each fee structure. They are general descriptions so expect variations.
A percentage of the value of the assets they manage for you;
Let’s say the advisor states they will charge 1% of the value of the assets. That means if you have a $500,000 portfolio your estimated fees will be $5,000 per year ($500,000 x .01). It’s an estimate because the fee is charged quarterly based on the value of your portfolio during or at the end of each quarter. Let’s assume the portfolio value doesn’t change throughout the year. Fees may be charged ‘in arrears’ or ‘in advance’. They will be calculated based on the value of the portfolio on the last day of the quarter or on the average value of the portfolio during the quarter. One quarter of the $5,000 annual fee, $1,250, will be the assets under management fee for the quarter. This fee is generally withdrawn directly from the account, unless you and the advisor agree to another payment option, e.g. check. The advisor will send you a statement showing the quarterly fees that are being withdrawn. The advisor may also charge a fee for setting up the account or a fee may be charged if you discontinue using the advisor, like the 2 quarters of fees assessed in the above example.
You will often see the words “fee-only” advisor. This means the advisor receives compensation exclusively through advisory fees. They are not paid commissions. The fee may be as a percentage of assets, hourly rate , or fixed rate.
A note about me: I am a registered investment advisor in Colorado. I receive my compensation from a percent of the value of the assets. Other rules may apply in other states. This description is meant to give a basic understanding of how fees are charged. You may find variations due to your state’s rules or advisors’ business models. Variations might be monthly fee calculations, rather than quarterly, a higher percentage charged when a minimum return is achieved and a lesser fee when the portfolio return is below the minimum. Read the agreement and ask the question, “how to you get paid?”
Part 2, How Do Investment Advisors and Stockbrokers Get Paid Part 2?, is a continuation that explains the other types of fees.