Fiduciary Financial Advisor Fees

Fee-Only Financial Planner Costs

Over the last twelve years, the government’s interest in financial advisor compensation has dominated the regulatory landscape. It began after the 2008 financial crisis with the Dodd–Frank legislation, which tasked the SEC with reviewing the two ways that financial advisors get paid: fees and commissions.

Next came the 2015 Fiduciary Rule from the Department of Labor. It would have required most financial advisors working with retirement plans, including IRAs, to charge a level fee if enacted as proposed. The belief was that the solutions provided to the client would be better because the compensation earned by the advisor was the same no matter the product recommended.

After much discussion, court battles, and changes, both are now in effect. The Fiduciary Rule no longer imposes a level fee, but it does require a fiduciary standard for most advisors interacting with retirement plans, including IRAs. On the other hand, Regulation Best Interest, another SEC rule, requires finance professionals paid by commission to work in the client’s best interest.

Fiduciary Fees

Financial advisors working under the fiduciary standard usually charge the client a fee based on the percentage of the client’s assets managed. They might also provide other financial planning services paid for by that fee.

That fee seems to hover around 1% by convention, or it started that way because it is a round number. Anything above seems excessive because clients usually have additional costs for the products, which are not paid to the advisor. Hopefully, the advisor keeps those product costs low by incorporating institutional share classes and index funds.

Hourly Fee

Instead of an asset fee, a fiduciary advisor could charge the client an hourly fee. However, again, the product recommended has no bearing on the compensation earned by the fiduciary advisor. However, I find the hourly fee arrangement less common as most people paying for fiduciary advisory services have substantial assets that the advisor charges a fee to manage.

However, the hourly fee arrangement may become more common as both the Fiduciary Rule and the Best Interest Standard place hurdles on advisors, recommending that customers roll over their 401k accounts.

That rollover is what the previous advisor charged for management or a commission earned after recommending a rollover for many people. Because of these hurdles, advisors may recommend that clients keep their money in the 401k and set an hourly fee arrangement to manage it there.

Commission

One problem with the commission model was that there were so many undisclosed conflicts of interest influencing the product recommendations. Too many times, the customer was placed into a higher-cost product. However, many of those conflicts should be gone with the new Regulation Best Interest, making a one-time commission a competitive alternative to ongoing fees for any client whose 401k plan doesn’t offer great choices for retirement income or institutional pricing.

These are the opinions of Financial Advisor Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only and should not be construed or acted upon as individualized investment advice. Content provided via links to third-party sites should not be considered an endorsement of content that we cannot verify completeness or accuracy of.

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