You invest so that you can achieve a variety of goals, such as a secure retirement. It’s inevitable, though, that you will incur some costs when investing, ranging from payments to a financial professional to costs of educational materials. So it’s a good idea to familiarize yourself with these expenses.
If you work with a financial professional – and you should, because the investment world is complex – you will need to compensate this individual for his or her expertise and guidance. Financial advisors get paid in different ways, including the following methods:
Fee only — Fee-based accounts may charge a fee as a percentage of your total portfolio. For example, if an account charges 1.5 percent per year, and your original account balance was $100,000, you’d pay a $1,500 fee. The next year, if your account value goes up to $110,000, you’d pay $1,650. This arrangement could function in different ways. For example, a financial advisor could work with you to create an overall strategy, consult with you on individual transactions and then carry out those transactions. Alternatively, the account could be a discretionary one, in which you grant the advisor the right to make all the decisions on your behalf.
A second fee-based arrangement is the per-hour charge, in which an advisor will charge you an agreed-upon amount per hour, then leave it up to you to implement his or her recommendations.
Commission only — Under this model, the financial advisor’s compensation consists of the commission he or she gets from the products you purchase. Some commission-based advisors may suggest trades to help you follow an overall financial strategy, while others may simply make the transactions that you’ve decided upon after consulting with them.
Which of these payment methods is best? There’s no one right answer for everyone. Your choice may ultimately depend on several factors, such as how involved you want to be in choosing your own investments, how frequently you plan to trade, how often you’d like to consult with an advisor, and so on. In any case, before you start working with a financial advisor, make sure you clearly understand how he or she is paid.
Apart from whatever costs are connected to working with a financial advisor, you may incur other expenses while investing. Some types of investments carry fees and expenses, which may or may not be included in the compensation your financial advisor receives. Your advisor should clearly explain the costs associated with all investments and investment programs.
One other area in which you may tack on expenses is through investment-related educational materials. For example, you might subscribe to an investment newsletter, or purchase books or magazines related to investing. Even if you work with a financial advisor, there’s certainly nothing wrong with educating yourself as broadly as possible about investment issues. Keep in mind, though, that any recommendations you read about are only intended for a general audience and may not apply to your individual situation.
As you invest through the years, always be aware of expenses and from where they originate. After all, you want to make educated decisions about every aspect of investing – including its costs.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor (member SIPC). Contact Stan at Stan.Russell@edwardjones.com.