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How to Get Wealth Management Without Paying a Fortune

SmartAsset: How Fee-Only Wealth Management Works

Financial advisors who are wealth management experts can earn fees in different ways. Fee-only wealth management firms charge clients a flat fee for services with no commissions. Clients pay for financial planning and investment management services. These firms have a pricing structure based on both advisory fees and commission on products, and they may be the most transparent in pricing and have less bias than firms that include commissions as part or all of their fee structure.

Consider working with a financial advisor as you create an investment or retirement plan.

What Is Wealth Management?

Wealth management is the process of growing assets through investing while preserving wealth and controlling risk. These services target high-net-worth individuals by having high minimum investment requirements. Wealth management services are especially suited to affluent clients since they usually focus on developing comprehensive financial plans and giving advice on issues concerning the wealthy. Some of these issues are estate planning, business succession and taxation. These specialized services are not all that wealth management firms offer. They offer an integrated approach by developing complete financial plans including services like retirement planning and investment management.

Financial advisors can also be wealth managers. The term “financial advisor” is often used as an umbrella term that covers financial professionals who assist clients with some or all their investing and financial needs. A financial advisor may provide the services that a wealth manager does, or they may provide only investment or portfolio management services and have the chartered financial analyst (CFA) certification.

Some may use the term “financial advisor” to refer to a certified financial planner (CFP). CFPs specialize in developing comprehensive financial plans for their clients, but they do not typically specialize in high-net-worth individuals. Wealth managers often focus on not only investment management but comprehensive financial planning.

Wealth management is not the same thing as investment banking. Investment banking is associated with corporate clients while wealth management is associated with affluent individuals. It is also not the same thing as private banking. Wealth management deals with investing and financial planning, but private banking may or may not offer investing services. They offer concierge services to affluent individuals like preferential interest rates, excellent terms for loans and deposit services. Private banking may require that individuals have funds on deposit that total six figures. Wealth managers typically ask for a minimum investment of $1 million or more.

What Is Fee-Only Wealth Management?

SmartAsset: How Fee-Only Wealth Management Works

There are three basic fee structures in wealth management. Fee-only wealth managers charge a flat fee or retainer, either hourly or annually, for investment management services with financial planning services included. You may pay $5,000 to $10,000 per year, or more, using this model.

Alternatively, the amount charged in a fee-only arrangement may be a percentage of assets under management (AUM). Since wealth management often starts with minimum investments of $1 million or more, if you pay an AUM, the cost of your wealth management services could be $10,000 or more if the actual amount of AUM that you have goes up. However, as your AUM goes up, the percentage you will pay goes down. Whether a firm charges a flat fee or a percentage of assets under management, fee-only wealth management tends to be more transparent to clients and is becoming more popular.

A second basic fee structure is commission-based wealth management. This model is falling out of favor in the industry with the number of fee-only wealth managers increasing. Commission-based wealth managers get paid a percentage commission for all the firm’s products and services they sell. Since wealth managers have a fiduciary responsibility to their clients, the commission-based model may lead to bias that is not appropriate for fiduciaries.

There is also the fee-based pricing structure, which means the wealth manager is paid in two ways. They are paid a fee directly by the client, and they can also earn commission from the sale of products and services that they recommend. Fee-only and fee-based wealth managers differ in two primary ways. First, the fee-only advisor earns a fee, paid by the client, for the wealth management services provided. The fee-based manager earns a flat fee paid by the client as well – but also earns commissions on the products and services they sell. Second, fee-only planners are under a legal fiduciary responsibility to only act in their clients’ best interest. Fee-based managers also have a fiduciary responsibility, but they also must follow a suitability rule, which simply says that any product or service recommended must suit the clients’ needs, which is a lessor standard than a best interest standard.

How to Cut Fee-Only Wealth Management Costs

SmartAsset: How Fee-Only Wealth Management Works

Before you employ a wealth manager, ask questions. Find out about their pricing structure. Are they fee-only, fee-based or commission? Do they charge an AUM? What is the percentage AUM? For a portfolio like yours, what basic fees do you have to pay per year? Some investments, like mutual funds, require additional fees like expense fees. When choosing investments ask before you invest whether the investment choices you make have additional fees.

Try to choose investments without additional fees or with low additional fees to minimize your investment costs. Finally, determine if the wealth manager will negotiate on the fee? If not, why not?

Bottom Line

A wealth manager is not for everyone. Only high-net-worth individuals can afford the sometimes-prohibitive cost of investment management. Fees cut into the returns on your portfolio. However, many high-net-worth individuals consider wealth management necessary. Fee-only wealth managers are becoming increasingly popular due to their transparent and non-biased pricing structure.

Tips on Financial Planning

  • SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • High-net-worth individuals also have a need for life insurance. Use SmartAsset’s life insurance calculator to estimate how much life insurance you need.

  • Check out SmartAsset’s inflation calculator to determine how much inflation is eroding the value of your portfolio and your purchasing power.

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