Ever wonder where financial advisor fees come from? In this highlight, Bo and Brian explain how financial advisors fees come out of your accounts.
To learn more about our financial planning side of the business, check out aboundwealth.com.
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Ever wonder where financial advisor fees come from? In this highlight, Bo and Brian explain how financial advisors fees come out of your accounts.
To learn more about our financial planning side of the business, check out aboundwealth.com.
Nick has a question, “When hiring a fee-only advisor with the majority of assets in a 401(k), IRA, and HSA, where can and should the fees come from? Can I make a distribution for management fees, or do I need to use money from other savings?”
That’s a good question. When you work with a fee-only financial advisor, you get paid a percentage based on the assets you are helping to manage. The fee is easy to calculate. You just take the value of the assets multiplied by the specific percentage. However, there is a problem. If the advisor bills your investment accounts directly, they can’t bill the 401(k), 457, or 403(b) directly.
There is an exception to this, though. For example, if you have a Schwab 401(k) or a 403(b) with Fidelity, they allow direct advisor billing, which is an incredible benefit. But, in most cases, you can’t bill those accounts directly. So, how should you pay the advisor? Nick asks if it makes sense to make distributions from his 401(k) or retirement account in order to pay the advisor fee. If you take distributions, your plan has to allow for in-service distributions, which a lot of plans won’t do if you’re still working and still an active participant. The second problem is that if you pull money out of those retirement accounts and you are pre-59 and a half, you will pay income taxes as well as likely a penalty on those distributions.
Given all that context, how do clients pay for the 401(k) assets or the 403(b)s? This is one of the things they ask about in the questionnaire because it’s so important. The account structure is key. They don’t want to get clients at all costs; they want it to be a win-win situation for both the client and themselves. If all your money is in a Roth 401(k) and there’s no ability to pull the fee directly out, that gives them pause.
First, he loves billing out of tax-deferred accounts. These accounts get filled up when you make lots of money, and you’re trying to make your contributions pre-tax to avoid current taxation because you think in retirement, you’ll be taxed at a lower rate.
Second, tax-deferred accounts are filled up like the stray puppy that follows you home because your employer has to put the money into those accounts so they can take the deduction for the funding. These accounts automatically grow.
Lastly, when you retire, you will have to pay ordinary income taxes on the tax-deferred accounts, and it will come out at a higher rate. The government even has a required minimum distribution once you reach 72, forcing you to take money out of these retirement accounts. If you can pay fees at a tax-deferred money, it’s huge because the money has never been taxed. If you can pay an advisor off of that account, in your own little way, you’re kind of Uncle Sam’s paying, depending on whatever your marginal tax rate is. That’s what Uncle Sam is paying on your fee. It’s kind of cool because you’re like, “Man, the uncle is helping!”
Ever wonder how to you know if you’re hiring the right financial advisor? Check out our free deliverable called, “8 Questions to Ask Your Financial Advisor.”