How much do you pay people to manage your money?
There are typically three ways financial advisors are paid:
- Fee-Only Planners are paid only for the advice they give. They do not earn commissions by selling financial products such as life insurance or mutual funds. (Beware though, because this term is used loosely. Confirm by checking their SEC disclosure statement, form ADV-Part II.)
- Fee-Based Planners earn fees for providing advice and they make commissions on some of the products they sell.
- Commission-Based Planners earn money from the products they sell.
Many investment advisors and wealth managers (even fee-only planners) charge a percentage of assets under management, so there is an incentive for the assets to grow. The more investments grow, the more advisors earn. This may sound like a good idea, but sometimes it may be in your best interest to pay off your mortgage or buy a business, which would result in reducing your assets under management, and possibly a conflict for your advisor.
Fee-only financial planners are registered investment advisors with a fiduciary responsibility to act in your best interest. They do not accept compensation based on product sales. Fee-only advisors have fewer inherent conflicts of interest, and they may provide advice that is more comprehensive.
We recommend finding an advisor who charges a flat fee, based on the complexity of your situation. That way, there is less conflict of interest if you want the flexibility to explore options like paying off your mortgage or, for example, giving money to charity. The goal for inheritors at this level isn’t necessarily accumulating wealth, but using it in ways that help them realize their potential and enrich their lives.
Your wealth may be tied up in trust funds, equity ownership of companies, properties, and other non-liquid forms. You may not have 100% control and freedom to determine the investment strategy for all of your money, but you do have a say – no matter how much your advisors, trustees, or executors may intimidate you. When you have confidence in your convictions, you can assert your values into your portfolios.
The job of your advisors or wealth coaches should be to support your education in the endeavor of wealth preservation. When they help to build your knowledge and your confidence, you can bet they are helping to build your potential too.
{Adapted from Living Richly: Seizing the Potential of Inherited Wealth, by Myra Salzer.}