PHUKET: Let’s be upfront and say that while no one likes paying fees, there is no such thing as a free lunch, and I, as a financial adviser providing financial advice, along with those on Wall Street who create investment products all need “to eat”, so to speak.

That said, there is no reason for you to pay unnecessary or excessive fees for financial advice or investment products once you have a firm understanding of how financial advisers on Main Street earn their money.

Understand how financial advisers get paid

Financial advisers will usually follow one of the following compensation models:

Fee only

Financial advisers who are fee only will typically charge you a percentage of the account value they manage and they will tend to favor individual stocks, bonds and low-cost ETFs, because they cannot accept commissions from financial product sponsors.

That’s because fee only financial advisers have a “fiduciary responsibility” to choose investments which are in your best interest and not because someone is paying them a commission on an investment product. Just be aware that not all fee only financial advisers are the same, as some charge lower fees because they provide more basic investment management services, while others charge higher fees because they provide full financial planning services (a complete financial plan or roadmap, for example).

Commission only

Financial advisers who don’t charge a fee will usually receive commissions from transactions and/or from those who create the investment products they sell.

And while there are commission only financial advisers who provide excellent financial advice, many others are merely good salesmen whose advice tends to be driven more by how they are being paid rather than by doing what’s best for you, the client. For that reason, you can expect commission only financial advisers to steer you towards annuities and managed funds that pay them the highest commissions.

Fee based
So-called fee based financial advisers will charge you a fee and receive commissions on the products they sell.

This means they do not have a “fiduciary responsibility” to do what’s in your best interest and that may end up costing you more than what a fee only or even a commission only financial adviser would charge.

Hourly rates or retainer

There are also some financial advisers who charge by the hour or a set fee – often to complete a special project that would otherwise be too complex even for a retail investor who is accustomed to managing his or her own money.

What arrangement is best for you?

Generally speaking, going for a fee only investment financial adviser who does not take commissions from those who create investment products like annuities or managed funds will end up being a better deal for you over the long term as they will steer you towards low cost investment products rather than those with the highest fees or commissions.

Likewise, and even if you are an experienced do-it-yourself investor, there might be times when paying an hourly rate or a retainer will also make sense (a large or complex 401k roll-over for American investors). Just be aware that many fee only, as well as commission based financial advisers, will require a minimum sized account to manage before it makes sense for them to take you on as a full time client. However and even if your account balance is small, don’t be afraid to check with a financial adviser to see if some kind of arrangement can be made to assist you if you need help.

Finally, no matter what type of financial adviser you use, make sure you take the time to understand what services he or she is offering for the fees you are being quoted. At the very least, your financial adviser needs to provide you with a detailed service and fee disclosure form.

Fees create a reverse compounding effect and reduce your nest egg over time. The higher the fees, in general, the greater the hit and reduced account size.

Don Freeman is president of Freeman Capital Management, a Registered Investment Advisor with the US Securities Exchange Commission (SEC), based in Phuket, Thailand. He has over 15 years experience and provides personal financial planning and wealth management to expatriates. Specializing in UK and US pension transfers. Call 089-970-5795 or email: [email protected]. Call to discuss ways to reduce portfolio fees and get your account growing efficiently.

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— Don Freeman

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