Millionaires don’t mind paying their advisors, but prefer advisory fees over commissions. How do the fee structures differ?

Mon, 12/05/2011 | BY Adriana Reyneri

Most Millionaire investors value their relationships with financial professionals, but would much rather pay them an advisory fee than a sales commission, according to a third-quarter study by Millionaire Corner.

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“Millionaires tend to have long-standing relationships with their financial advisors and use these professionals in a variety of ways,” said Catherine McBreen, president of Millionaire Corner. “Many engage brokers to recommend stocks and place trades. Others hand over a percentage of their assets to a financial advisor to manage. The idea is to compare their advisor’s results with their own. One trend that does emerge is a preference to pay an advisory fee, rather than a commission for advice and services.”

The majority of Millionaires (61 percent) are comfortable with the fees that they pay to an advisor, though 49 percent said they found advisory fees to be “very expensive” and 22 percent felt that they could do a better job than an advisor.

More than half (55 percent) of investors with $1 million to $5 million said they preferred to pay fees for financial or investment advice, rather than have the cost of the service built into product sales. The remaining 45 percent said they prefer the cost to be included in the advisor’s commission.

More than two-thirds of Millionaire investors preferred a fixed fee for service, rather than a fee based on a percentage of assets. More than half (52 percent) expressed a preference for a fee tied to the performance of an investment product, while 48 percent preferred to pay a fixed fee for advice.

Advisors are compensated in one of six basic ways, according to Money Over 55. Financial advisors and investment advisors will commonly charge a fee based on a percentage of the assets they manage. This type of fee, which typically ranges from .5 percent to 2 percent of assets on under management, gives an advisor an incentive to grow assets.

Financial salespeople will typically charge a commission on products sold, and this form of compensation can influence the advice they give to investors, according to Money Over 55. Commissions can be collected as an up front sales load, or can be paid to an advisor from an investment firm.

Many advisors charge a combination of fees and commissions, some charge an hourly rate for financial advice, and others charge a flat fee for a specific project, such as creating a retirement plan.

“There is currently no uniform method by which financial planners are paid,” states the Certified Financial Planner Board of Standards regarding advisory fees. “Like other professionals, the rates financial planners charge depend on their experience, geographic location, level of services and your needs. Interview more than one planner to get an idea of the going rate for financial planning services.”