As if managing your investment portfolio weren't challenging enough.
These days, consumers who turn to financial planners for help must also contend with a minefield of compensation models, making it tough to ferret out exactly what financial advisors charge in fees.
A 2012 study by Cerulli Associates and Phoenix Marketing International, in fact, found more than 60 percent of investors either did not know how their advisors got paid or thought that the service they offered was free.
A little tip? It never comes free.
"Investors are very sensitive to the fees they pay directly to their advisors, and all but oblivious to the fees they pay indirectly," said Barbara Roper, director of investor protection for the Consumer Federation of America.
Time to pull the curtain back on how financial professionals earn their keep—and what their words of wisdom cost you.
The following five questions, aimed squarely at your advisor, can help ensure you get the biggest bang for your buck.
Do You Collect a Commission or Fees?
Financial advisors generally fall into one of three camps: fee-only, fee-based or commission-based.
Independent fee-only investment advisors are paid solely by you, based on the amount of your money they manage.
Fee-based advisors are a more recent industry hybrid. These advisors charge you a percentage of assets being managed, but also collect a third-party commission for selling insurance and investment products.
Commission-based advisors, on the other hand, charge their clients for trades, but most of their compensation comes from the companies that create the funds they sell. In other words, their fees are built into the cost of the products they sell.
Although commission brokers often bill themselves as financial advisors, you can also see them as the sales force for the insurance and investment industry, earning an incentive payment each time you purchase a financial product they recommend.
Each of the three models creates different incentives, which is why it pays to understand them. A fee-only or fee-based advisor might be tempted to put you into investments that are too risky for you in the hopes of quickly building up your assets. A commission-based advisor might sell you a fund that's not the best choice for you because he or she is earning a higher commission on it.
What Percentage of Assets Under Management Do You Charge, and Do You Also Charge a Flat Fee?
Some advisors charge an hourly rate or flat fee to analyze your assets (including real estate, retirement accounts, personal savings and life insurance policies) and create a comprehensive financial plan based on your goals, tax implications, time horizon and risk tolerance.
(Watch: Manage Your Porfolio in 2013)
To manage your portfolio on an ongoing basis, however, they typically charge an annual percentage of your assets under management.
That may not sound like much, but the percentage you pay makes a big difference in your long-term return.
For example, an investor with a $500,000 portfolio earning 7 percent per year would be sitting on $2 million after 20 years. Had she paid an advisor 1 percent of his assets during those years, however, her account value would fall to $1,655,000—a difference of $364,000.
"The single most-important thing you can do to improve the performance of your portfolio is to reduce your costs," Roper said.
Do You Sell Load Funds?
If you work with a commission-based advisor, you will pay a transaction fee each time you trade a security—which can range from $10 at discount firms to several thousand dollars at larger institutions. That can add up fast if you actively trade.
It's the hidden fees, however, that hurt the most.
Brokers who work on commission collect a one-time sales fee for selling load funds to their clients. Load funds are simply mutual funds that include a sales charge.
In the case of front-end load funds, investors pay 3 percent to 8 percent of the amount they are investing, some of which gets passed directly to the broker in the form of a commission.
Are There Any 12b-1 Fees?
Commission-based advisors and some fee-based advisors also collect 12b-1 fees from mutual fund companies when clients purchase shares of a fund that they recommend—ongoing payments that continue for as long as their client owns the fund.
That fee, which typically is not disclosed to investors, gets passed along to investors through the fund's elevated expense ratio.
To offer some perspective, mutual fund expense ratios can range from 0.2 percent for index funds to up to 2 percent for actively managed specialty funds.
Will I Owe Surrender Fees if I Bail?
Some insurance products and annuities sold by commission-based advisors also include a surrender charge, in which the client forfeits 8 percent to 10 percent of the funds they contributed if they cancel their policy before a certain number of months—or years.
When vetting your financial professional, it's important to ask the right questions. And demand honest answers.
"We interviewed several advisors," said Michael Teems, a retired engineer in Annapolis, Md., who performed his own due diligence before selecting a financial planner to help convert his nest egg into income.
"One advisor we went to was more of a salesman, with a back room full of people who were there to help me pick investments," he recalled. "I wasn't naive enough to think that some of these planners weren't going to get paid. Everyone who touches the money gets paid."
Teems asked directly how much their time was going to cost and his queries were met with candor. Ultimately, he and his wife opted for an independent advisor, paying slightly more than 1 percent on assets managed.
"It's important," Teems said. "You have to know what you're getting."