The financial industry is this strange meld of commission, percentage of assets, hourly and flat rate. Understanding how your advisor is compensated may help you determine if they are a good fit for your financial goals.
To keep it simple, focus on advisors that do not earn commissions only, but have the flexibility to offer what best suits your personal situation. They might charge a percentage of your assets, a flat fee for services or an hourly fee.
Decide what services are important to you. Then make sure the planner aligns with your needs.
As an example, do you want holistic financial planning services that include tax and retirement planning, or are you looking for an advisor whose main focus is managing your investment portfolio?
You’ve heard how important it is to be diversified, right? Your asset allocation is how you create a diversified portfolio.
You don’t want someone who is just going to only pick one type of stock. Your portfolio should include domestic and international stocks, and small-, mid- and large-cap companies.
Asking this question is a way of ensuring the advisor has your tax bill in mind when making financial decisions on your behalf.
What you want to know is: What do you get to keep after fees and after taxes?
Don’t forget that you’re paying for someone to clarify your financial life, not make it more confusing. If an advisor is not doing that, walk away.