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When I worked as an investment advisor on Wall Street in the ’80s, there was only one way we would get it: commissions.
When you bought or sold the shares, the customer paid about 1% of the transaction value. When I sold my annual salary, I received my 4% salary. When I sold a mutual fund, the commission was anywhere from 2% to 7%.
At the time, advisors were making a living by taking a portion of any money you invested. And for many, that remains true to this day.
However, this system is not the best. For one thing, advisors get paid more for some investments than others, which can affect their advice. Another problem: While the best way to manage money is often to do nothing, your advisor can’t pay off the mortgage unless your money is on the move.
It was such shortcomings, combined with a desire to create a steady income for advisors, that led years ago to a new model: instead of charging a fee for each transaction, a set percentage of assets under management, usually around 1%, is charged. Got a hundred thousand? You’ll pay $1,000 a year. Million? You will pay $10,000.
But this system is not perfect either. For example, does managing a million dollars really require 10 times the effort of managing $100,000? And if the stock market doubles, does that guarantee a 100% increase to your advisor?
One last way to pay for advice has also gained popularity: pay by the hour, just as you would an accountant or attorney. the problem? As with an accountant or attorney, hourly rates can be high.
So, what should an investor do?
This is “money!” podcast about. We’ll talk if you need advice, and if you want it, where to find it and the best way to pay for it.
As usual, journalist Miranda Marquette will be giving presentations. He listens and sometimes contributes to producer and novice investor Aaron Freeman. And this week we have a special guest, Pam Krueger of Wealthramp, a service that helps people find fee-only financial advisors who are legally obligated to always put their clients’ interests first.
Sit back, relax and listen to this week’s song “Money!” Audio notation:
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