Understanding Advisor Fees

November 2, 2022

Financial advisors, also known as wealth advisors or wealth managers, charge for their services in a variety of ways. As a result, comparing different fees or commissions can be tricky.

When shopping around, make sure a prospective advisory firm is upfront and transparent about asset management fee structure. This includes disclosing which services are covered under the specific agreement. Advisors should also tell you whether they receive a commission—and how much—based on their recommendations of certain products or services.

In addition, some wealth management firms have broader service offerings compared with other advisors, which can mean a higher value-to-cost advantage for you.

Here are some of the costs you’re likely to encounter when comparing prospective advisors and the associated fees for your investments:

  • Advisor fee or management fee. Many wealth managers charge a flat fee—typically about 1% of total assets under management (AUM)—based on how much money they manage for you. Sometimes this flat fee is applied on a scale, so the more AUM you have, the lower the percentage fee. Under this “fee-only” arrangement, the advisor or firm earns more money only if you do. However, some financial advisors who work under a “fee-based” model will earn a fee despite what happens with your portfolio, and might also earn commissions on the products they sell.
  • Commission. Trade commissions or transaction charges are typically linked to a product. You may pay this fee when you buy or sell stocks, bonds, and other investments. The cost can vary depending on which broker you use. Mutual funds sometimes pay a brokerage to offer their funds without a transaction charge, but this cost may then show up in the form of a higher expense ratio.
  • Expense ratio. Expense ratios represent the cost of running a mutual fund or exchange-traded fund. These fees are charged back to the shareholders. The higher the operating expense, the smaller the investor return. Ask the advisor about the average expense ratio for different asset classes that are being recommended as part of your investment portfolio.
  • Surrender charge. You might pay this fee when you sell, cash in, or cancel an insurance policy, annuity, or certain type of investment.
  • Custodial fee. If you’re working with an advisor, you won’t be charged this type of fee. Self-directed investors who have a brokerage account might encounter a custodial fee if their balance falls below a minimum threshold or if the account includes certain types of investments.

Comparing value vs. cost of services

It’s important to understand the total cost you pay for the services or value you receive. As part of your research, ask whether a wealth manager is willing to negotiate on the asset management fee structure to deliver more value for what you pay. For example, a relatively large wealth management firm that has offices in several states is often able to negotiate with vendors to bring down operational costs so that your expense ratios and custodial fees can be lower.

Once you have a clear picture of how various advisors and firms are paid for their services and expertise, you’ll have a better understanding to evaluate the options and hire an advisor with confidence.

Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.

All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.

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