June 15, 2009: What type of fee should you pay your New York financial advisor or financial planner?

Some people feel that there is only one "right" type of fee to pay a financial advisor and every other type of fee is wrong. In reality, the best fee might depend on your situation. First, let's look at the types of fees which a financial planner or financial advisor in New York might charge.

Asset-based fee: This fee is charged as a percentage of the account which the financial advisor has under management. For instance, a 1% fee on a $100,000 account means the advisor would charge $1,000 (usually on top of any fees charged by the mutual funds they put your money in). This is also often known as a "fee-only" financial advisor. Some people prefer this because the financial planner's fee increases or decreases along with your account value, and their fee doesn't change depending on what funds they put you in, so they have no incentive to steer you to certain investments.

Planning Fee: Some financial advisors will charge a fee for specific advice, such as $1,000 for preparing a retirement plan, or $100 an hour for helping you with certain questions. Some people prefer this fee arrangement because they can ask for help with questions outside of the specific account an asset-based advisor would handle. And the fees might be cheaper if you can pay for just a few hours and don't need ongoing advice.

Commissions: Some financial advisors and brokers get paid based on a commission charged for each financial product you purchase. Commissions are sometimes looked upon negatively, because a financial advisor might want you to make lots of trades or buy certain products to increase their commission. However, most financial planners are ethical and wouldn't churn your account. In fact, for a simple buy and hold portfolio, commissions might be the simplest and cheapest way for you to invest.

Many financial advisors and brokers in New York will accept accounts with more than one type of fee. For instance, they might have an asset based fee for your IRA, and earn a commission on your purchase of life insurance. Although you can look for financial advisors that charge a certain type of fee, the important thing to remember is that you should always understand the fee no matter what type they are. Make sure you ask your financial planner how they are getting paid and that they clearly explain it to you.