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Demystifying the World of Fees: What You Need to Know About Financial Advisor Fees

Demystifying the World of Fees: What You Need to Know About Financial Advisor Fees

| May 03, 2018

The world of financial planning and investment can be confusing. But layer with it the oftentimes-complex fee structure of various financial institutions and advisors and you may be asking yourself, “What am I getting for my money?”

Pinnacle Financial Advisors encourages this question – if you haven’t asked it, you really should. We have a comprehensive service and fee schedule that helps to provide answers.

To figure out what you’re getting for your money, it’s a good idea to step back and review fees. In essence, there are three types of core "fees:"

  1. Financial planning service fees, which are usually based on total wealth and the complexity of your life situation;
  2. Investment account management fees, which are strictly based on the monetary balance in a client’s account; and
  3. Deductions from accounts by financial institutions as disclosed in prospectus documents.

Both the financial planning service fees and investment account management fees are typically billed by the advisor directly to the client for services they render. In the case of deductions from accounts, the client usually pays the financial institution directly and it may pass along a commission to an advisor.

Many articles have been written on whether one type of fee creates a greater or lesser conflict of interest between the client and the advisors. For instance, an advisor's compensation might provide an incentive to recommend one product over another. This is often talked about as it relates to certain insurance offerings but plays a role with all products and services.

There are many other sources that generate incentives for advisors. Among them, an advisor may have intentionally limited the variety of products they provide to a small subset of what is available in the marketplace to keep down costs related to product research or other such expenses for the firm. While this is generally fine for people looking for an advisor who can sell them a specific product, it can get in the way of fulfilling a complete financial plan that covers all the client's financial needs.

But the question remains: What value am I getting?

The challenge all professional services have in common is that it is often difficult for a client to assess whether what they just got was indeed worth the expense. Every client’s measure is subjective – are they measuring against time, the accomplishment of certain milestones, the insightfulness of the answers they get to their questions, the service level provided by the advisor’s team, against monetary growth, against the number of investments they have…the list of measures is boundless.

By working with a holistic financial planner who has a fiduciary responsibility to you, you are much more likely to be able to answer that question in the affirmative – yes, I am getting value – than if you are purchasing financial products one at a time from a financial salesperson. Even if such a financial salesperson has a fiduciary responsibility (as RIAs do), it is only limited to the specific product you purchased from them.

As cliché as it sounds, "You get what you pay for." That is especially true if your advisor can demonstrate the value provided. Investing in your future means investing for the long term without nickel-and-diming yourself in the short term.