Introduction: Cost of a Financial Advisor
Like any service that one acquires, the cost of a financial advisor is relative to the perceived value that he or she delivers to their client.
Put differently, let’s assume that you and I have similar financial circumstances and have opted for similar sets of financial services from separate professionals.
The cost of your financial advisor might still be more expensive to you, than mine is to me.
So why the difference?
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Broker-dealers vs. Registered Investment Advisors
To find out why you may feel you are paying more or less for financial advice than someone else, you first need to understand what makes financial advisors “different”.
Broker-dealers (BDs) are financial advisors who get paid to sell you specific products.
The cost of your BD financial advisor includes a percentage of the sales proceeds as commission/fee, while he/she may also receive a separate remuneration from the sponsor of the product sold to you.
Registered Investment Advisors (RIAs) on the other hand represent you directly.
The cost of such a financial advisor largely depends on the understanding between advisor and client.
Within these two categories of financial advisors there are various models of how clients pay for financial products and services they receive.
Generally speaking, the more complex your individual financial situation is, the higher the cost of the financial advisor will be to you.
Modes of Payment
Some clients need just the bare minimum of support in their financial lives.
Others need the financial advisor to do it all. And between these two extremes lies an array of clients needing various levels of support.
The cost of your financial advisor can come in any of the following ways, based on the level of support needed:
- A pre-determined percentage of your portfolio’s market value
- A commission for specific products or services rendered
- Hourly rate for advice delivered
- Flat fee for specific services delivered
- Ongoing retainer-based fee
In some cases, the cost of a financial advisor may include a combination of one or more of these methods of payment.
Real versus Perceived Value
So how expensive are financial advisors, really? It ultimately comes down to the client’s priorities.
For some investors, the cost of their financial advisor can’t be measured in terms of dollars charged.
It is measured in terms of intangibles, like:
- Peace of mind,
- Trust, and
If an advisor delivers all of these elements, but occasionally fails to deliver stellar returns, a client may still feel they received value for the cost of retaining the financial advisor.
Other clients may be more unforgiving. If the returns delivered do not far outweigh the cost of their financial advisor, they may feel they have not received value for money spent.
Ultimately, the cost of a financial advisor cannot be looked at as purely an “expense”.
It is a long term investment that both investors and clients make towards achieving success.
As with any investment, when the costs outweigh the benefits (both real and perceived), the investment is definitely expensive!
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