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Understanding Investment Advisor Fees
Before you make any major financial decision, one of your first questions should always be, "How much?" It is important to be clear not only on exactly what you will receive, but also how much it will cost. Many people use an investment advisor to help them manage their investments and ultimately reach their financial goals. Unfortunately, there seems to be a fair amount of confusion surrounding the fees investment advisors charge – the, "how much for what?" question. While I believe advisors deserve to get paid because they offer a valuable service (see my article on Why You Need an Investment Advisor), I also believe that fees should be very simple and transparent.

The first step in understanding investment advisor fees starts with knowing what type of advisor you have. There are three types of advisors: registered investment advisors (RIAs), broker-dealers, and dual-registered brokers that also act as advisors. RIAs adhere to the "fiduciary standard" which means they must act in their clients' best interest. Broker-dealers, on the other hand, are held to a less rigorous standard, called the "suitability standard", which means they must recommend investments that would be "suitable" for their clients, but not necessarily in their best interest. And, dual-registered brokers must balance the two, sometimes acting with fiduciary duty and sometimes not.

Once you understand the types of advisors, the fee structures follow. There are three basic structures that investment advisors use to charge fees for their services.

  1. Fee-only: RIAs generally use "fee only" arrangements which can be structured using one or a combination of the following methods:

    • Percent of Assets Under Management (AUM): Advisors may charge their fee as a certain percentage of the assets they manage for you. There are several advantages to this arrangement. The advisor does not track how long they spend working on your account, but rather works for as long as it takes to ensure your overall financial situation is effective for you. They will spend as much time as it takes to help you with anything you need including personalized financial planning, budgeting, portfolio rebalancing, and tax planning. This is the method I use because it ensures my interests are aligned with yours in earning the most efficient returns to help you meet your financial goals.

    • Hourly: Advisors may charge a certain amount per hour for working on your account. Typically, an hourly rate is charged for someone who just needs a one-time service performed and not ongoing asset management. One drawback to this structure is that people are reluctant to pay what seems to be a high hourly rate and will instead either delay or avoid working with their advisor to maintain their portfolio. This can be detrimental to their investment portfolio in the long run.

    • Flat: Advisors may charge a flat fee for specific services agreed upon in advance. The flat fee arrangement also works best in the case where a client just needs one or two specific services performed.

    • Retainer: Advisors may charge an estimated amount which is paid upfront for any services. This amount can be partially refunded or you could be billed for additional hours depending on how much time is eventually spent on your account. A drawback to the retainer arrangement is that a significant fee is due up front.

  2. Commission-only: Broker-dealers get paid by earning a commission on the products they sell you, such as mutual funds or insurance policies. Keep in mind, these brokers do not have a legal duty to you but rather to their employers (e.g. insurance companies) which can cause a conflict of interest. Moreover, brokers are not required to disclose these conflicts of interest to you. The obvious downside to this arrangement is that the only way the broker makes money is to sell you an investment. So, they are motivated to transact before they are motivated to look after your best interests.

  3. Fee-based: Fee-based advisors combine the commission-only and fee-only models. They can earn a commission from a product they sell you or charge a fee, or both. The serious downside to this structure is that you will never know for certain when the advisor is working with you as a fiduciary or when they are recommending a particular investment in order to receive a commission.

In addition to understanding the different structures for paying investment advisors, it is also important to understand how much an average advisor charges. Keep in mind, these averages can vary depending on your location, account size, and complexity of your financial plan.

Average Fee
Commission 3-6%
Fee-Only (% of assets) 1-2%
Fee-Only (Hourly) $120 - $300
Fee-Only (Flat) $1,000 - $3,000
Fee-Only (Retainer) $2,000 - $11,000
Source: DaveRamsey.com

Form ADV

Investment advisors are required to provide you with a copy of their Form ADV (including annual updates), which is a form advisors must use to register with the Securities and Exchange Commission (SEC) and/or state securities authorities. The second part of this form must be written in plain English and contains information such as the types of advisory services offered, the advisor's fee schedule, disciplinary information, conflicts of interest, and the educational and business background of management and key advisory personnel of the advisor. Our firm ADV can always be found on the WT Wealth Management website and my personal brochure on my profile page.

My Promise to You

I will always answer any questions my clients have about fees directly and openly. I will explain in simple terms exactly how much I am earning in advisor fees. I am not paid by anyone other than you, the client. Therefore, I always work in your best interest. My goal is to be completely transparent in the fees you pay, the services I provide, and the fiduciary duty I have toward you, my client.

If you have any questions about investing or are wondering how you can get started, I would be happy to meet with you for a no-cost consultation. You can e-mail me at gleest@wtwealthmanagement.com or call (928) 225-2474.

Sincerely,

Gleen Leest

Glenn Leest

References:
Hogan, Chris. "How Does a Financial Advisor Get Paid? Should You Use One?"



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At WT Wealth Management we strongly suggest having a personal financial plan in place before making any investment decisions including understanding your personal risk tolerance and having clearly outlined investment objectives.

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WT Wealth Management is an SEC registered investment adviser, with in excess of $100 million in assets under management (AUM) with offices in Flagstaff, Scottsdale, Sedona and Tucson, AZ along with Jackson Hole, WY and Las Vegas, NV. WT Wealth Management is a manager of Separately Managed Accounts (SMAs). With SMAs, performance can vary widely from investor to investor as each portfolio is individually constructed and managed. Asset allocation weightings are determined based on a wide array of economic and market conditions the day the funds are invested. In an SMA, each investor may own individual Exchange Traded Funds (ETFs), individual equities or mutual funds. As the manager we have the freedom and flexibility to tailor the portfolio to address an individual investor's personal risk tolerance and investment objectives – thus making the account “separate” and distinct from all others we manage. An investment with WT Wealth Management is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Any opinions expressed are the opinions of WT Wealth Management and its associates only. Information offered is neither an offer to buy or sell securities nor should it be interpreted as personal financial advice. Always seek out the advice of a qualified investment professional before deciding to invest. Investing in stocks, bonds, mutual funds and ETFs carries certain specific risks and part or all of an account's value can be lost. In addition to the normal risks associated with investing, narrowly focused investments, investments in smaller companies, sector and/or thematic ETFs and investments in single countries typically exhibit higher volatility. International, Emerging Market and Frontier Market ETFs, mutual funds and individual securities may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability that other nations experience. Individual bonds, bond mutual funds and bond ETFs will typically decrease in value as interest rates rise. A portion of a municipal bond fund's income may be subject to federal or state income taxes or the alternative minimum tax. Capital gains (short and long-term), if any, are subject to capital gains tax. Diversification and asset allocation may not protect against market risk or investment losses. At WT Wealth Management, we strongly suggest having a personal financial plan in place before making any investment decisions including understanding personal risk tolerance, having clearly outlined investment objectives and a clearly defined investment time horizon. WT Wealth Management may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Individualized responses to persons that involve either the effecting of transactions in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption. WT Wealth Management's website is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of WT Wealth Management's website should not be construed by any consumer and/or prospective client as WT Wealth Management's solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the internet. Any subsequent, direct communication by WT Wealth Management with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A copy of WT Wealth Management's current written disclosure statement discussing WT Wealth Management's registrations, business operations, services, and fees is available at the SEC's investment adviser public information website (www. adviserinfo.sec.gov) or from WT Wealth Management directly. WT Wealth Management does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to WT Wealth Management's web site or incorporated therein, and takes no responsibility therefor. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

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