As you can see, financial planning can be very complex and require several different skill sets. If you find all of this to be overwhelming, you are not alone. And, if your retirement portfolio is such that you can, and are willing to consider complex strategies, your next question will be whether the value added by a wealth management professional is worth the cost, and perhaps, how a wealth manager gets paid. 

While it’s difficult to quantify some aspects of working with a wealth advisor, some of the strategies could be expected to yield a benefit much greater than the fees paid—such as reducing investment costs or reducing tax liabilities. Also, significant opportunities present themselves intermittently as tax laws change or markets react to various political or economic factors. In such circumstances, a proactive advisor may have the opportunity to add tens of percentage points of value-added and may more than offset years of advisory fees.

How a Wealth Manager Gets Paid: 

Wealth managers typically earn their income through one or a combination of the following methods:

Fees Based on Assets Under Management (AUM): This is the most common method of compensation. The wealth manager charges a percentage of the total assets they manage for a client. This fee usually ranges from 0.5% to 2% per year, depending on the size of the portfolio and the complexity of the service. The advantage of this model is that it aligns the wealth manager’s interests with those of the client; as the client’s wealth grows, so does the wealth manager’s compensation.

Hourly Fees or Flat Fees: Some wealth managers charge an hourly fee for their services, or a flat fee for a specific service, such as creating a financial plan. This can be a good option for clients who only need advice occasionally or for a specific purpose.

Commissions: In some cases, wealth managers may earn a commission for selling certain financial products, such as mutual funds, insurance policies, or annuities. This model can potentially create a conflict of interest if the wealth manager is incentivized to recommend products that are not in the best interest of the client.

Performance-Based Fees: Some wealth managers charge a fee based on the performance of the investments they manage. This is more common in hedge funds and other high-risk investment vehicles. The manager might charge a flat fee (like 2% of AUM) plus a percentage of the investment gains (like 20% of profits). This type of fee structure is generally only offered to accredited or institutional investors due to its high-risk nature.

Retainer Fees: Some wealth managers may charge a retainer fee, which is a fixed amount paid regularly, often quarterly, or annually. This is usually an arrangement for clients with larger portfolios and more complex financial situations.

The method of payment can have a significant impact on the advice and service provided, so it’s important for clients to understand how their wealth manager is compensated. All these models have their pros and cons, and different models may be appropriate for different clients, depending on their needs and circumstances. As a best practice, wealth managers should disclose their compensation structure upfront and in a transparent manner.