Home > Personal Finance > What’s the Best Way to Pay My Financial Adviser?

Comments 0 Comments

Q. I’m going to work with a financial planner and I have two ways I can pay the 1% management fee. Either I can pay cash (then it’s deductible) or it can be taken from my retirement accounts (then it’s not, but it’s not a cash flow issue). What are the pros and cons?
— Unsure

A. There are definitely pros and cons in terms of what accounts you use to pay your financial planner, but there are other things to consider before making that decision.

There are many types of payment models for financial services professionals, said Jeff Rossi, a certified financial planner with Peak Wealth Advisors in Holmdel.

He said some get paid commissions and fees based on products they sell to you, while others charge a percentage of the assets they manage, while others may even charge hourly or on a retainer basis for investment management and/or financial planning services.

It depends on the financial services professional, the organization they work for, and of course, the preferences of the client, Rossi said.

He said one of the most common ways for a fee-only or fee-based planner to assess fees is based on assets under management (AUM).

“Most investors and financial professionals feel that this model aligns the motivations of both parties because it’s win-win if the value of the portfolio increases,” Rossi said. “That said, it’s not without its cons.”

Rossi said dissenters will point to situations when a financial professional recommends an investor transfer assets from a 401k into an IRA so that the financial professional could include the assets in his or her AUM.

No compensation model completely eliminates conflicts or issues, Rossi said.

“The best way to pay your financial professional is via a model that aligns with your specific situation and needs,” Rossi said. “It pays to ask a lot of questions about fee structures before signing on the dotted line.”

If you’re not sure what to ask, the National Association of Personal Financial Advisors (NAPFA) has a list of tips and questions for consumers to ask when interviewing financial planners.

When paying via an AUM model, some things are not as clean cut as they may seem.

If you pay the fee out of a taxable account, Rossi said, it’s generally deductible to the extent the investment-related expenses — along with your other miscellaneous itemized deductions — exceed 2% of your adjusted gross income (AGI).

“The caveat is that the portion of the expense that is deductible needs to be tied to investment management and not financial planning,” he said. “Sometimes it’s not clear where financial planning services end and investment management work begins, which is why a 1% AUM ‘bundled’ fee can cause some questions if you were to get audited after taking the deduction.”

Some people prefer to pay the fees via a retirement account because taking it out of the retirement account (assuming it’s pre-tax) can reduce Required Minimum Distributions (RMDs) in the future, Rossi said.

He said others prefer to pay fees from a pre-tax account such as an IRA because that money has not been taxed and when it is paid to the financial adviser, it’s one of the few times earned income is never taxed.

“The major caveat with paying fees from an IRA is that the fees should be for investment management services on the IRA,” Rossi said. “When an IRA’s assets are used for other non-IRA expenses, it is deemed to be a distribution from the account, and in extreme situations could cause the IRA to lose its tax-qualified status.”

Most financial planners can set up AUM billing per account, so a blended approach may work best if you want to realize some of the benefits of paying from an IRA, Rossi said.

[Editor’s Note: Remember, it’s good for your overall financial health to keep on top of your credit, because good credit can help you save money over time on financing — whether it’s a mortgage, car loan or a line of credit. You can check your credit reports for free every year through AnnualCreditReport.com and monitor your credit scores for free on Credit.com.]

More on Credit Reports & Credit Scores:

Image: UberImages

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team