Commission vs. fees for advisors?

Ask NJMoneyHelp

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Q. We are close to retirement and are looking for a financial advisor. I read your answer about advisors who charge a fee to create a financial plan compared to those who charge a fee for assets under management. But what about advisors who don’t charge any fees and make money on commission? Commission seems like you’d pay a lot less over the long run.
— Learning

A. It’s great to look for a financial advisor as you near retirement.

Before we get to how advisors are paid — which is a very important consideration — there are other issues, too.

Defining what you want to accomplish will help you determine what role you need an advisor to play in assisting in the development of a plan for your retirement, said Dawn Brown, a certified financial planner with Lassus Wherley in New Providence.

For example, are you looking for someone to just handle your investments or someone who will work with you on other aspects of your financial life? Are you looking to establish a long-term relationship with an advisor, or to receive recommendations you will implement on your own?

Once you are clear on the type of advice you need, then you can start the search for an advisor, Brown said. And sometimes, the search for an advisor will help you focus on what you are trying to accomplish.

Now, how advisors are paid.

One determination is if the advisor is just focused on investments or if they offer broader planning services, Brown said.

“When an advisor charges you based on commissions, it may seem that the cost is less but the full cost is usually not transparent,” Brown said.

Commissions may be charged upfront, referred to as A shares, usually in the range of 3 to 5 percent. These upfront fees reduce the funds available to invest on your behalf, Brown said.

Or, the fee can be continuous, known as C shares, and these are paid for the period of time you hold the investment, Brown said.

There may be also be a sales charge if you only hold C shares for a short period, often within a year.

“If you choose to work with an advisor that earns commissions, make sure you understand how he or she is paid, how much and how the costs may impact your investments and the other advice you may receive over time,” she said.

Some advisors charge a one-time fee for a financial plan. In this case, the plan is presented to you and you proceed with the implementation of the plan.

“This may work well for some individuals who are willing and able to implement the plan but if you need assistance in implementation this may not be the right type of advisor,” she said.

Brown said advisors who charge an assets under management fee or work on a retainer basis may be more hands on with the implementation of a plan.

But make sure you understand the service they provide. There are advisors who charge for assets under management and only provide investment advice and other advisors that include financial planning advice, Brown said.

“Typically advisors who offer financial planning services and investment management will develop a plan and work with you to ensure it is implemented,” she said. “This will normally be a long-term relationship where the advisor not only works with you but with your other advisors such as your accountant and attorney to implement the plan.”

They will also work with you on other aspects of your financial life that occur while you their client, she said.

Brown said it’s also important to make sure that you work with an advisor who commits to putting the client’s interests first.

“You should meet with a few advisors and determine who you believe will be the best person for you,” she said.

Some of the best resources are the Certified Financial Planner (CFP) and NAPFA websites, she said.

The Certified Financial Planner website lists financial advisors who hold the CFP designation. These advisors have completed extensive training, passed a proficiency exam and are required to keep up to date on financial matters, Brown said.

Another source for finding an advisor is NAPFA, the National Association of Personal Financial Advisors.

“Members of NAPFA are fee-only advisors. They only receive fees from their clients,” Brown said. “They do not receive commissions based on the investments they choose for your accounts. They also do not receive fees if they refer you to another professional, for example to purchase life insurance.”

And while you’re looking, don’t forget to check NJMoneyHelp.com’s Find an Advisor page.

Email your questions to moc.p1506274271leHye1506274271noMJN1506274271@ksA1506274271.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.