Let’s look at some different ways in which advisors get remunerated. Financial advisors can get paid in several ways and here are some of the more prevalent ways for payment in the offshore world.
Percent of Account Value
Often associated with investments it is also referred to as Asset Under Management (or AUM). This is where an advisor charges a percentage annual fee based on the value of assets invested with them. This charging method generally ranges between 0.5 - 2.0% per annum, typically the more assets under management, the lower the fee. The annual percentage fee is generally ‘ﬁxed’ regardless of prevailing market conditions. So the advisor is effectively charging an ongoing ‘management’ fee to continuously manage the investment portfolio on your behalf The most popular investment platforms will allow financial advisors the ﬂexibility to vary this fee percentage to reﬂect the level of service provided. For example, an advisor providing a full ﬁnancial planning service usually charges a higher rate than one just executing for a knowledgeable investor.
This is the most common way that financial professionals are paid across all ﬁnancial products in the offshore world. The commissions are generally specific to different types of products and can range from 1-8%, either upfront or throughout the life of the product. For example, when you buy an Unit-linked insurance product, a certain percentage charge maybe deducted by the financial product provider and a percentage of that will be paid as a commission to the advisor. Although difﬁcult to avoid for pure insurance products, regular savings, investments and various hybrid insurance products can generate ongoing ‘trailing commissions’
Combination of Fees and Commissions
Finally, you will ﬁnd that some advisors will offer a combination of the above remuneration structures and sometimes call it “fee-based”. This a hybrid approach that allows the advisor to charge an agreed fee for the ﬁnancial plan or advice while still collecting some commissions. This approach generally aims to minimise any ‘upfront’ commissions in return for an objective ﬁnancial plan or advice. Any subsequent commissions earned via the execution of the plan are generally minimised or reimbursed to recoup the planning fee.
An hourly fee approach is generally used where only speciﬁc advice is sought or if you are willing to do some work yourself and implement the advice given. Similar to other professions such as lawyers and accountants; an hourly rate approach is generally free of any commissions. And just like solicitors or accountants, hourly rates will be expected to vary widely from adviser to adviser. Expect to pay a higher hourly rate for experienced advisors, or advisors who have an area of specialty.
Fixed (Flatted) Fees
Similar to an hourly rate advisor can be compensated by charging a ‘professional’ consultation fee for the performance of an agreed ﬁnancial task or advice. The scope of work is typically agreed beforehand and the fee quoted is generally a ﬁxed fee representing the time and effort required to prepare the ﬁnancial advice. The charges can range from $500 to $10,000 or more.
A task or advice scope that involves ongoing servicing or advice may require an ongoing fee arrangement. For instance — managing small business complexities, regular income streams from investments, ongoing stock options and others. This is effectively an ongoing professional fee arrangement and should be distinct from AUM fee or any trailing commission, which are only triggered when a product is purchased or invested in. A written contract detailing the fee and services is usually provided.