Generally financial advisors are paid either by charging fees or earning commissions.
Commission-Only Advisors earn their income by selling financial products such as insurance or mutual funds, or may also earn a fee for trades that they execute.
Fee-Only Advisors earn their income by charging fees. Some common methods include an hourly rate, an annual or retainer fee or as a percentage of investments under management.
Fee-Based Advisors earn their income using a combination of fees and commissions.
It may seem like semantics but we believe it is very important to know what you are paying and how. Some advisors may not tell you what the fees you are paying unless you ask. Be sure to find out about the fees, sales charges, loads, commissions or any other costs you may incur up front. Sometimes compensation methods may not be as obvious they should be.
Loads: A “load” is another term for sales charge. If you are buying an A-share there is an up-front sales charge of usually around 5%, but can be as much as 8%. A B-share does not have an up-front charge, but requires you to own the fund for a certain period of time, typically 5 to 7 years. If you wish to sell the fund before then, you will pay a charge at that time. At Jersey Shore Financial Advisors, LLC, we recommend “no-load” mutual funds to eliminate these charges.
Expense Ratio: The expense ratio is the percentage of the total fund assets that is used to cover expenses. These include management fees, which are paid to the fund manager, and operating expenses.
12b-1 Fees: These are additional marketing and distribution fees that are charged to you by a fund. These are included in the calculation of expense ratio and sometimes called a “hidden load.” Often, a portion of these fees is used to compensate financial advisors, so your funds may be helping to pay an advisor to market. Does this make sense??
As part of our planning process we will analyze the cost of your current investment program and make a recommendation keeping in mind your goals, objectives tolerance for risk etc.
Be wary of advisors who claim their services are “free.” I don’t know of anyone who can work “free.”
It’s more likely they are being paid in other ways, without specifically explaining that to you and potentially in ways that may not be best for your personal financial goals.
Working with a Fee-only financial advisor is important but don’t take our word for it -- read what these experts have to say about it: