How to choose a financial advisor: 10 questions
2. How will I pay for your services?
The advisor should clearly state in writing how she will be paid for the services provided. The three basic methods of payment are: Fees based on an hourly or flat rate; fees based on a percentage of your portfolio value, often called "Assets Under Management" ("AUM"); and commissions paid per transaction. How often you expect to trade, and whether you want your money pro-actively managed, will help determine which model works best for you.
Some things to keep in mind about fees:
--Planners who earn money based on commission rather than a flat or asset-based rate could have an incentive to steer you in a particular direction. When considering how you will actually buy or sell, you should determine whether you need a salesperson or an advice-giver.
--If you need a way to buy and sell securities, then you can open an online account with a discount brokerage firm (often the cheapest option), where you will not receive any advice, or you can work with a brokerage firm that provides you with a person who can talk to you. Most firms charge commissions, which is best suited for someone who wants to park stocks in an account and not trade them often.
--If you want a money manager who will make investment decisions for you, based on your investor profile and risk tolerance, than you are likely to pay via AUM. But fee-based advisors aren't perfect. Advisors earning 1 percent of your assets might be disinclined to encourage you to liquidate your investments, even if that's the right move, because their fee would shrink as a result of that advice.