How does fee-based investing work? (2024)

FAQs

How does fee-based investing work? ›

In fee-based investment accounts, advisors and the investment or mutual fund dealers they work for will typically charge an account fee for advice, access and service directly to the investor. This fee is usually disclosed and arranged up front, and is often based on the assets in your account.

Usually, a fee-based service is offered by a financial advisor who charges an annual percentage of the client's assets as a flat fee for all or most professional services. The average fee is 1% to 3% of the assets.

Fee-based advisors could be helpful for people who don't want to work with multiple financial professionals though. If you want to buy insurance from the same person who created your financial plan, some fee-based advisors can do that for you. You also simply might have an advisor you like who happens to be fee-based.

Investment fees are fees charged to use financial products, such as broker fees, trading fees, and expense ratios. Investment fees are one of the most important determinants of investment performance and are something on which every investor should focus. Over time, minimizing fees tends to maximize performance.

Many financial advisers charge based on how much money they manage on your behalf, and 1% of your total assets under management is a pretty standard fee. But psst: If you have over $1 million, a flat fee might make a lot more financial sense for you, pros say.

Amounts paid for financial planning are generally not tax deductible. These include fees paid to an advice-only financial planner (i.e., one who doesn't deal in specific investments). However, if you paid fees on a fee-based investment account that includes financial planning, the fees are generally tax deductible.

In most cases, a fee-only advisor is going to be the best choice because they're incentivized to act as a fiduciary for their clients, and typically you won't have to worry about potential conflicts of interest when they're making recommendations.

Most of my research has shown people saying about 1% is normal. Answer: From a regulatory perspective, it's usually prohibited to ever charge more than 2%, so it's common to see fees range from as low as 0.25% all the way up to 2%, says certified financial planner Taylor Jessee at Impact Financial.

While 1.5% is on the higher end for financial advisor services, if that's what it takes to get the returns you want then it's not overpaying, so to speak. Staying around 1% for your fee may be standard but it certainly isn't the high end. You need to decide what you're willing to pay for what you're receiving.

What is a fee-only financial planner? A fee-only financial planner is paid directly by clients for their services, be it a flat fee, hourly rate or a percentage of assets under management. The latter is typically around 1% of a client's portfolio's value each year.

How high is too high for investment fees? ›

A number of factors determine whether an expense ratio is considered high or low. A good expense ratio, from the investor's viewpoint, is around 0.5% to 0.75% for an actively managed portfolio. An expense ratio greater than 1.5% is considered high.

Financial adviser ongoing fees

You agree an ongoing fee in advance, which may be a percentage of assets under management. A typical independent financial adviser fee might be between 0.25% and 1%, but some advisers may charge a different percentage depending on your circ*mstances.

The industry typically refers to this as an investment management fee and averages between 1-2% of assets (i.e. A $100,000 investment could cost you between $1,000 - $2,000 annually).

For a potential investment to pass the 1% rule, its monthly rent must equal at least 1% of the purchase price. If you want to buy an investment property, the 1% rule can be a helpful tool for finding the right property to achieve your investment goals.

At Morgan Stanley, or any big firm, 1% is a fairly common fee---and a fair one, in many cases--provided it covers all transaction costs and is the Advisors' sole compensation on the account [meaning that the client's interest should be the Advisor's only interest.]

Fee-based advisors usually charge their clients a flat rate (or an "à la carte" rate), while commission-based advisors are generally compensated by commissions earned from financial transactions and product sales.

Fee income is the revenue taken in from account-related charges. Charges that generate fee income include non-sufficient funds fees, overdraft charges, late fees, over-the-limit fees, wire transfer fees, monthly service charges, and account research fees, among others.

Fee-only financial planners get paid by you directly; fee-based planners may also earn commissions on products they sell. Ask any advisor how they make money.

A managed account is a portfolio that is owned by one investor but is supervised by a professional money manager who has been hired by that investor. Money managers can demand six-figure minimum investments to manage accounts and are compensated by a fee, calculated as a set percentage of assets under management (AUM).