Figure Out Compensation Fee Structures

Physician's Money DigestOctober15 2003
Volume 10
Issue 19

Fees and costs in the investment arena are varied and not always easy to discern. Another cost is the price of financial planning or asset management. While the range of fees can be broad, how compensation is structured may be a more important distinction. One factor involved in the cost is the type of services that you purchase.

If your consultant is providing financial planning only (ie, you're making the transactions yourself based on your consultant's recommendations), that may lead to 1 type of compensation structure. If you're purchasing both financial planning and brokering services, compensation may be addressed differently.

Asset managers and financial planners typically employ which of these compensation structures?

  • Commission-based
  • Any or all of the above

Here's a closer look at some of the most common fee structures that investors encounter:

• Asset management fees (wrap accounts). In this scenario, brokers or financial planners charge a percentage of your assets to manage your portfolio. Some will include other financial planning services in their management fees. Others may charge an additional fee for financial planning.

A typical fee for portfolio management is 1%, but your asset mix can affect the charge. For example, if your account consists primarily of fixed-income assets, the fee may be lower (ie, 0.6% or less). If your account is heavy on individual stocks, the fee may be as high as 1.5% to compensate your advisor for the additional research involved.

Once the fee is established, you shouldn't be paying any commissions or loads. You may have administrative expenses (eg, ticket charges). And your broker or advisor may be garnering 12(b)-1 fees from the mutual funds in your portfolio. Typically, advisors who earn such commissions tend to charge their clients a lower asset management fee.

All your purchases should be at net asset value. Most mutual funds allow investment advisors to waive the load within a wrap account. Your advisor should waive the load and purchase the class of shares with the lowest expense ratio. If you're paying an asset management fee and loads, your advisor is double- dipping, which is inexcusable.

Wrap accounts bring a number of advantages. First, it's a pay-as-you-go system. You typically pay your fee on a quarterly basis. To keep you satisfied, your advisor must actively service the account. Because your advisor doesn't earn a commission on each sale, you'll know that any changes recommended should be in your best interest.

Wrap accounts also provide you and your advisor with the flexibility to make changes without being restricted by commission costs. Be aware, however, that frequent buying and selling in a taxable account will generate frequent tax bills. This, too, is a common feature of wrap accounts, but not a cause for alarm.

• Commission-based. As the name implies, commission- based advisors earn the bulk of their compensation through commissions. These advisors may charge their clients an additional nominal fee for financial planning or analysis.


• Fee-only. Fee-only advisors don't earn commissions. Instead, they charge either a flat fee or an hourly fee. Although many fee-only advisors don't implement transactions for you, if they do, they may charge an additional fee for implementing and monitoring. If hourly fees would inhibit the free flow of ideas between you and your advisor, this billing approach might not be for you.

• Fee-based. These advisors charge a fee but have the ability to earn commissions. Many financial professionals who charge an asset management fee but also pick up trailing commissions are considered to be fee-based advisors.

• Fee and commissioned. Advisors in this category charge a fee to prepare a financial plan but may pick up additional compensation from transactions.

Reprinted with permission of the publisher, from What's Your Investing IQ? © 2003 Carrie L. Coghill and Evan M. Pattak. Published by Career Press, Franklin Lakes, NJ. All rights reserved. To order the book, call 800-227-3371 or visit

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