When I worked as a Wall Street investment adviser back in the 80s, there was basically only one way we got paid: commissions.
When I bought or sold shares of stock, the client paid about 1% of the value of the trade. When I sold an annuity, I got paid 4%. When I sold a mutual fund, the commission was anywhere from 2 to 7%.
So back then, advisers made a living by taking a slice out of whatever money you invest. And for many, that's still true today.
That system, however, isn't the best. For one thing, advisers get paid more for some investments than others, which can influence their advice. Another issue: While the best way to manage money is often to sit tight and do nothing, your adviser can't pay their mortgage unless your money is moving.
It was flaws like these, along with the desire to create a steady, predictable adviser income, that years ago led to a new model: Instead of charging per transaction, charging a set percentage, typically around 1%, of the assets under management. Got a hundred grand? Pay $1,000 a year. A million? 10 thousand.
But that system isn't ideal either. For example, does managing a million really require 10 times the effort of managing $100,000? And if the stock market doubles, does that warrant a 100% raise for your adviser?
A final way of paying for advice has also gained in popularity: paying by the hour, just as you do with an accountant or lawyer. The problem? As with an accountant or lawyer, hourly rates can be high.
So, what's an investor to do?
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