Investor unsure how to pay financial planner

Q. A financial planning question about a hypothetical example: Say I have $10,000 to invest in stocks and bonds. My financial planner charges a 1 percent fee. Would it be better to A) take the $100 fee from the $10,000, leaving $9,900 to invest, or B) invest the entire $10,000 and take the $100 fee from my money market fund?
— Jeff

A. Let’s assume that you have a comprehensive relationship with your adviser that warrants a fee-based arrangement.

Both of the fee payment options you pose should be considered, said Jim Marchesi, a certified financial planner with Mill Ridge Wealth Management in Chester.

“Covering the fee from your money market fund will allow for the investment account to achieve a higher asset level over time,” Marchesi said. “But, this set-up requires you to continually add money to your money market fund — a fund that has a very low rate of interest — to cover future fees.”

Paying the adviser fee out of the investment account undeniably reduces the asset level available for investment, Marchesi said. Yet, the adviser fee should be considered in the overall asset management costs.

Over time, the management process and results, net of all costs, should yield an acceptable risk-adjusted return on the assets.

Michael Maye, a certified financial planner and certified public accountant with MJM Financial Advisors in Berkeley Heights, said in the short run it will depend on whether the equity and fixed-income markets are going up or down. Longer term, taking the fee from a lower yielding account and investing more in higher return assets will result in a better return.

But, Maye said, he thinks he smells a trick question, and that you may really be wondering if it makes sense for the adviser to debit your account for the 1 percent fee compared with you cutting a check from your money market to pay the fee.

“Many financial planners who charge a 1 percent fee do so against the client’s assets they manage,” he said. “Typically, they use the assets allocated to cash to withdraw their fee so in essence it is the same as taking the fee from the money market account.”

In terms of cautions, Maye said you should make sure you understand what services you are receiving for the 1 percent fee, and how the adviser’s compensation model works.

“In terms of the compensation model, another point to understand is whether the adviser is fee-only or fee-based,” he said. “A fee-only adviser does not earn any other commissions from the sale of products, while a fee-based adviser might also earn additional compensation for sale of products.”

Karin Price Mueller

E-mail your questions to [email protected]


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