Fees

I classify investment fees into these 5 categories:

1. Sales commissions
Conversations with financial advisers who earn their living from sales commissions seem to always deteriorate into sales pitches for high commission investment products like annuities, long-term care insurance, actively managed accounts, and over-funded life insurance. How can there not be a conflict of interest?

2. Percentage of investment value
Amazingly, this category is called fee-based.
The financial adviser earns a flat percentage of investor's assets, regardless of performance. This is a cash cow for advisers. Rates usually range from 1% to 3% per year.

3. Percentage of investment gain
SEC "Section 205(a)(1) of the Advisers Act prohibits an investment adviser from receiving any type of advisory fee calculated as a percentage of capital gains or appreciation in the client's account."

4. Strict hourly rate for advice or services (fee-only)
This may be a good choice for investors who are not able to create and execute their own financial plan. The adviser charges a fee to create an investment plan, which the investor may implement. Alternatively, investors who are too busy or don't get around to doing things, may use an advisor to execute the plan for the investor and periodically re-balance, for additional fees. Some large mutual fund companies will also provide this service.

5. Self-investing costs
For those who are able to create and implement their own plan, there are still costs. Mutual funds have annual expenses. ETFs, stocks, and bonds usually have transaction expenses.