What’s the Best Way to Pay My Financial Adviser?


Q. I’m going to work with a financial planner and I have two ways I can pay the 1% management fee. Either I can pay cash (then it’s deductible) or it can be taken from my retirement accounts (then it’s not, but it’s not a cash flow issue). What are the pros and cons?
— Unsure

A. There are definitely pros and cons in terms of what accounts you use to pay your financial planner, but there are other things to consider before making that decision.

There are many types of payment models for financial services professionals, said Jeff Rossi, a certified financial planner with Peak Wealth Advisors in Holmdel.

He said some get paid commissions and fees based on products they sell to you, while others charge a percentage of the assets they manage, while others may even charge hourly or on a retainer basis for investment management and/or financial planning services.

It depends on the financial services professional, the organization they work for, and of course, the preferences of the client, Rossi said.

He said one of the most common ways for a fee-only or fee-based planner to assess fees is based on assets under management (AUM).

“Most investors and financial professionals feel that this model aligns the motivations of both parties because it’s win-win if the value of the portfolio increases,” Rossi said. “That said, it’s not without its cons.”

Rossi said dissenters will point to situations when a financial professional recommends an investor transfer assets from a 401k into an IRA so that the financial professional could include the assets in his or her AUM.

No compensation model completely eliminates conflicts or issues, Rossi said.

“The best way to pay your financial professional is via a model that aligns with your specific situation and needs,” Rossi said. “It pays to ask a lot of questions about fee structures before signing on the dotted line.”

If you’re not sure what to ask, the National Association of Personal Financial Advisors (NAPFA) has a list of tips and questions for consumers to ask when interviewing financial planners.

When paying via an AUM model, some things are not as clean cut as they may seem.

If you pay the fee out of a taxable account, Rossi said, it’s generally deductible to the extent the investment-related expenses — along with your other miscellaneous itemized deductions — exceed 2% of your adjusted gross income (AGI).

“The caveat is that the portion of the expense that is deductible needs to be tied to investment management and not financial planning,” he said. “Sometimes it’s not clear where financial planning services end and investment management work begins, which is why a 1% AUM ‘bundled’ fee can cause some questions if you were to get audited after taking the deduction.”

Some people prefer to pay the fees via a retirement account because taking it out of the retirement account (assuming it’s pre-tax) can reduce Required Minimum Distributions (RMDs) in the future, Rossi said.

He said others prefer to pay fees from a pre-tax account such as an IRA because that money has not been taxed and when it is paid to the financial adviser, it’s one of the few times earned income is never taxed.

“The major caveat with paying fees from an IRA is that the fees should be for investment management services on the IRA,” Rossi said. “When an IRA’s assets are used for other non-IRA expenses, it is deemed to be a distribution from the account, and in extreme situations could cause the IRA to lose its tax-qualified status.”

Most financial planners can set up AUM billing per account, so a blended approach may work best if you want to realize some of the benefits of paying from an IRA, Rossi said.

[Editor’s Note: Remember, it’s good for your overall financial health to keep on top of your credit, because good credit can help you save money over time on financing — whether it’s a mortgage, car loan or a line of credit. You can check your credit reports for free every year through AnnualCreditReport.com and monitor your credit scores for free on Credit.com.]

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CFP vs. CPA: What’s the Difference?


Q. Are there real benefits to going to a financial planner who is also an accountant? What should I look for?

— Learning

A. We’re glad to hear you’re paying close attention to what credentials different advisors have to offer.

Financial planners who are certified financial planners, or CFPs, have extensive experience and education in comprehensive financial planning, including the areas of insurance, investment, income tax, retirement and estate planning, said Jodi Cirignano, a certified financial planner with Lassus Wherley in New Providence.

When you choose to work with a CFP who is a licensed certified public accountant, or CPA, you may obtain access to an even broader range of services and subject matter expertise, particularly in the areas of business planning, tax planning and tax preparation, Cirignano said.

“CPAs are trained to integrate the income and estate tax implications of financial decisions into a client’s overall planning, helping client’s optimize their after-tax income and returns,” she said. “Many CPAs also have experience in advising business owners on issues such as personal and business financing, business succession issues and cash-flow management.”

She said earning the CPA credential requires a significant amount of education and experience and a commitment to 120 hours of continuing professional education every three years.

Cirignano said a CFP and CPA practitioner can provide a powerful combination of skills, experience and expertise for clients, but ultimately, you will want to select an advisor based on who is best suited to help you with your unique issues.

“In addition to inquiring about the advisor’s credentials during the interview process, you will want to determine if the advisor’s strengths complement your needs, if they are experienced in working with clients that have similar financial profiles and planning issues, the scope and the cost of their services,” she said.

Be sure to understand how the advisor is paid before you enter into any relationship.

Financial well-being requires ongoing management and planning to build, protect and transfer wealth, Cirignano said.

“Working with the right CFP or CFP/CPA professional who understands your concerns and is well-positioned to address these can provide peace of mind for you and your family,” she said.

[Editor’s Note: You can monitor your financial goals, like building a good credit score, each month on Credit.com.]

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