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Hiring a financial advisor can be a great move to help you achieve your financial goals and establish an investing strategy based on your individual needs and circumstances. Advisors can work with you to develop a personalized financial plan and build an investment portfolio to meet your longer-term goals, as well as help you plan appropriately to enjoy a comfortable retirement.
But how much does a financial advisor cost? And how do you make sure you’re not paying too much?
Over the years, financial advisor fees have evolved as the industry has moved to a more transparent pricing structure. But there is still a lot of confusion on how financial advisors make money, and how much is a reasonable amount to pay.
We’ve put together this guide to walk you through how financial advisors make money so you can make an informed decision when deciding on who you hire and how you will pay for their services.
Before we talk about how you can pay for a financial advisor, let’s review what an advisor can do for you and why hiring one can be a worthwhile investment.
What Does a Financial Advisor Do?
Though many people use a financial planner simply to invest for retirement, this is only a small part of what many advisors offer. Here’s a quick rundown of possible services a financial advisor may offer you:
- Budgeting and money management
- Funding college and higher education
- Debt management
- Insurance planning
- Retirement planning
- Other investment planning
- Inheritance planning
- Estate planning
- Tax planning
As you can see, financial advisors can help with your entire financial picture, not just investing. As you start to plan for life’s bigger milestones, you should consider finding a financial advisor that specializes in the areas most important to you.
By finding the right financial advisor, you’re more likely to minimize risk, maximize gains and take advantage of tax breaks while investing for your future. They can also help you protect your assets with the right kinds of insurance, and help you pass on your financial legacy with a proper estate plan.
Now that we know a financial advisor can help you build a plan for your entire financial life, let’s talk about how much you can expect to pay to work with a financial advisor.
How Much Does a Financial Advisor Cost?
The cost of hiring a financial advisor can vary significantly based on the services provided. Paying a 1% fee on your assets managed by a financial advisor is quite common, but there are at least seven ways financial advisors are compensated by clients, each with varying costs:
- Percentage of Assets Under Management (AUM)
- Subscription-Based (Annual or Monthly Fees)
- Percentage of Income
- Flat-Fee Plan
- Hourly Fee (with Retainer)
- One-Time Fee (Modular Pricing)
- Advice Only
Let’s review each compensation model in greater detail to learn the costs you can expect to pay a financial advisor for their services.
1. Financial Advisors Who Charge Based on Percentage of Assets Under Management (AUM)
This is the most common way traditional financial advisors charge for their service. This is called the “assets under management “ or “AUM” fee model. The current industry standard is to charge anywhere from 0.50% – 2% of the assets being managed on an annual basis. Most advisors will fall somewhere around the 1% fee mark and will often charge a discounted rate above certain tiers or asset thresholds.
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This means if you deposit $500,000 with a financial advisor, at a 1% fee, they will charge you $5,000 annually to handle your investments. Or, if they charge 1% on the first $250,000 of your assets they manage and .75% for assets above $250,000, your annual cost for a $500,000 portfolio would be $4,375 ($2,500 + $1,875).
While the price you pay to a financial advisor under the AUM fee model is calculated based upon the assets they manage for you, you will likely receive additional services such as the development of a financial plan for no additional cost.
This model is a generally accepted industry standard, especially for those investing for retirement. This fee pays the advisor to invest your money for you based on your risk tolerance, goals, timelines, and other factors of your financial plan.
Finding a full-service advisor who will manage your funds for 1% or less is generally considered attractive, while paying significantly more may cost you a large portion of your potential returns over time.
Best For – If you want a full-service advisor with no hidden fees, finding a good fee-only advisor who charges based on AUM may be a good fit.
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2. Commission-Based Financial Advisors
When a financial advisor is commission-based, they make commissions from selling you certain financial products (such as mutual funds, insurance products and other types of securities). This model is becoming less and less popular, as there may be an inherent conflict of interest involved. There has been pushback against this model, as many clients have been sold financial products that they did not necessarily need, netting the advisor a hefty commission while the products underperformed.
An indicator that your advisor is commission-based is if they offer a financial product, such as a mutual fund, that has a “front-loaded” fee structure. This means if you invest $10,000 into a mutual fund with a 5.50% front-loaded fee, you will pay $550, and the remaining $9,450 is invested.
Some of these funds claim to outperform the stock market over time, but always research the historical performance and reviews of any fund before you choose to invest.
Best For – If you want to avoid annual fees and don’t mind paying for financial products (as long as you understand them), you may consider a commission-based financial advisor.
3. Financial Advisors who Charge Subscription-Based Fees (Annual or Monthly)
Some advisors don’t collect a fee based on the assets they are managing for you but instead put together a subscription-like service, charging a monthly or annual fee for advisory services.
These services can range from $50 per month to $500 per month (or more), depending on the level of support needed.
Most of these subscription services charge a one-time cost to get started, then a monthly (or annual) fee for ongoing support.
Depending on the level of service you sign up for, there are typically “packages” that offer a limited amount of annual meetings, reviews, and 1:1 time with your advisor. Typically, the more you pay, the more access and guidance you get from your advisor.
Best For – If you don’t have a large balance of investable assets but still want access to a financial advisor, the subscription model may be a good fit.
4. Financial Advisors who Charge Based on a Percentage of Your Income
A newer fee structure has emerged recently called the “percentage of income” model. Instead of charging a fee based on a percentage of your total assets, these advisors are charging a percentage of your current income.
This fee is designed to help those who may have a decent income, but are at the beginning of their financial journey and don’t meet the minimum investment threshold for many traditional financial advisory firms (typically, $100,000 – $500,000).
Instead of paying 1% of assets under management, clients instead pay 1% of their annual income for financial advice. In this model, a $150k/yr earner would pay $1,500 per year for financial and investing advice.
Best For – If you have a good income, but don’t have a large balance of investable assets and still want access to a financial advisor, the percentage of income model may be a good solution.
5. Flat Fee Financial Advisors
A growing number of financial advisors offer services for a flat fee as an alternative to traditional pricing models (e.g. charging you 1% of the value of your portfolio managed by the advisor).
If you’re thinking about hiring a flat fee financial advisor, it’s important to look under the hood to understand what services are offered and how the fee is calculated. For example, a flat fee charged by some financial advisors may include developing a financial plan for you, but not investing your money on your behalf. Other flat fee financial advisors might include investment advisory services.
And just because a financial advisor charges a flat fee doesn’t mean every client will pay the same rate. In many instances, the flat fee might be calculated based upon your income, portfolio size, and/or the overall complexity of your individual circumstances.
Flat fee financial advisors will typically outline exactly what is included in this planning service, with different tiers for more comprehensive planning. For example, the flat fee may include creating a detailed financial plan for your debt, goals, investments, and more. Be sure to ask the financial advisor up front if they will implement the plan for your investments on your behalf or if they will leave it up to you to follow the details of the plan.
In certain instances, you may only require a flat-fee financial advisor’s work one time (in which case, you may want to consider an hourly financial advisor, though the same financial advisor may offer both pricing models and should be able to steer you to the pricing model likely best for your individual needs).
Clients of flat fee financial advisors often work together for many years where the flat fee is recalculated annually and often billed quarterly. The cost of hiring a flat fee financial advisor can vary significantly from $1,000 to $10,000 per year (or more), depending on the scope and detail of the financial plan provided, whether or not investment management is involved, and the complexity of your circumstances.
TJ van Gerven, CFP® Talks Flat-Fee Pricing
Best For – If you plan to establish a longer-term relationship with a financial advisor who charges you a fixed cost each year, a flat fee financial advisor may be an ideal solution for you. This is especially true if you plan to manage your own investments.
Q: Why should I consider hiring a financial advisor with flat fee pricing?
TJ: While no type of fee model is perfect, the flat fee model is one of the most transparent and fair advisor-client compensation methods. It helps to remove the conflict of interest of “looking to gather your assets,” as well as a variety of conflicts around paying down debt vs. investing. With a flat fee model, you always know what you’re paying and what you’re paying for. It also allows you to work with an advisor regardless of your assets.
Q: Is there a scenario when a flat fee arrangement may not make sense for me?
TJ: A flat fee model may not make sense for you if you’re looking for a one-off engagement. In that case, you may be better served by an hourly advisor.
6. Hourly Fee Financial Advisors (with Retainer)
Some advisors work on an hourly basis, with prices ranging from $150 per hour to $400+ per hour. These prices do not change based on your total assets managed, so you’re only paying for the time you need with the advisor.
Many of these hourly services come with an up-front retainer cost, buying a block of hours upfront for the year for you to use when you want.
For example, if an advisor charges a $2,500 retainer fee at $250 an hour, you’ll have 10 hours of planning services available to use throughout the year. Each additional hour would then be billed at the normal hourly rate.
Some hourly financial advisors will give you full-service management of your investment portfolio (there may be additional fees for this), while others will only bill for 1:1 time and leave the money management and investing up to you (based on their guidance).
Best For – If you simply want access to a financial advisor to answer questions and help you build a financial plan, paying for an hourly-based financial advisor may be a good fit.
Ryan Firth Talks Hourly-Rate
Q: When does it make sense for me to consider hiring a financial advisor who charges an hourly rate?
Ryan: Hourly (or time-based) advice is highly flexible. It tends to make sense for someone who can self-implement recommendations, someone who is hands-on when it comes to their personal finances.
For example, if you’re looking for a second opinion on your investment portfolio, or just need one-off financial advice, then a time-based fee for service (i.e., “hourly”) might be just what you’re looking for. If you tend to delegate tasks or want someone to manage your investments for you, then hourly advice might not be a good fit for you. One of the cool things about hourly planning is that there really aren’t any restrictions on the type of clients that an advisor can work with.
7. Financial Advisors who Charge a One-Time Fee (Modular Pricing)
Many financial advisors offer “a la carte” services, allowing you to choose the type of financial planning services you want to focus on. These services include budget planning, college funding, retirement planning, insurance planning, 401(k) review, and many other individual options.
These are typically billed as one-time fees, typically starting at $500. These are not a comprehensive financial plan for all of your goals but focus on a specific area of need. Clients pay for the advice and plan, but it is on them to execute the details of the plan.
Best For – If you need help in a specific area and don’t want to fork over thousands for a comprehensive plan, consider paying a one-time fee for a specific planning session.
8. Advice Only Financial Advisors
If you consider yourself a DIY (do it yourself) kind of person, you’re not alone. Millions of Americans successfully start and complete DIY projects every day.
But just because you decide to do a project yourself doesn’t mean you have to learn how to do the task on your own. In fact, most DIY projects start with education in the form of instructional videos, articles, and books, or even live demonstrations.
The same holds when it comes to managing your personal finances and investing. If you consider yourself a DIY investor and are comfortable managing your own money, you may not want to hire a traditional financial advisor and turn over financial decision-making to someone else. Fortunately, a new breed of advice only financial advisors has emerged as a popular choice among DIY investors interested in professional guidance at a very attractive cost.
An advice only financial advisor offers financial planning and investment guidance to their clients who are then responsible for implementing the recommendations on their own. Because they do not manage your investments for you, the cost of hiring an advice only financial advisor is often considerably less than hiring a traditional financial advisor, especially for people with large investment portfolios.
Advice only financial advisors are Registered Investment Advisors (RIAs) regulated by the Securities and Exchange Commission (SEC) or by state regulators where their services are available. Many advice only financial advisors will hold their Certified Financial Planner certification and will likely charge an hourly or flat fee for their services.
Best For – DIY investors interested in professional guidance at a very attractive cost.
Danielle Miura, CFP®Talks Advice-Only Advisors
Q: Should I hire an advice-only financial advisor or a traditional advisor who will manage investments on my behalf?
Danielle: “Advice-Only firms ensure transparency of compensation and minimize conflicts of interest. At Spark Financials, we provide financial advice to empower our clients to be self-reliant and visualize their financial future. We are the navigator and our clients are the driver.
Our firm is set up to not hold or have access to our client’s assets, therefore our clients are protected from hidden fees. When a financial advisor manages assets, many clients are not able to see the direct impact of fees taken out of their accounts over time.
We also do not refer clients to someone that can manage their assets, hence preventing any kickback or markup compensation. We minimize conflicts of interest and fees for our clients so they can reach their goals faster and safer. Instead of managing our clients’ assets to make them rely on us, we educate our clients so they can eventually be independent. Our goal is to be as transparent as possible; this means no commission and no hidden fees.”
How to Choose a Financial Advisor
Now that you have the details of how most advisors charge for their services, here are a few things to review before choosing your financial advisor.
Decide Which Services You Need
Before hiring an advisor, determine what services you need from them. Whether it’s full-service investment management, or a plan focused on a specific area of your finances, put together a list of what you’d like help with before contacting an advisor.
You may also want to consider hiring a financial advisor who specializes in serving clients with particular needs or interests. For example, many XY Planning Network financial advisors are dedicated to a specific niche (e.g. business owners or educators).
Review Fee Structures
Once you have a list of what services you would like, review the fee structures offered by financial advisors. Finding a balance between the services you need and the cost of those services will help you narrow down the field of advisors you may want to work with.
If you are looking for a full-service advisor to manage all of your investments, consider searching among fee-based financial advisors who offer the AUM pricing model. If you want to manage your money yourself, consider the flat fee and monthly subscription advisors for ongoing support.
Interview Multiple Advisors
Once you have chosen the services and fee structure you desire, it’s time to contact a few advisors and interview them. Here are a few questions to ask when interviewing a financial advisor:
- What services do you provide?
- What are all the ways you get paid? (fee transparency)
- What is your investment strategy?
- How do you measure investment performance?
- How do we communicate about my plan?
Interview multiple advisors to get a feel for who you want to work with. A combination of fees, services, and customer service will help you determine the best fit for your financial advice.
Check Advisor Credentials
Once you find an advisor (or two) that you feel comfortable with, it’s always a good practice to check their credentials, such as the financial certifications they hold and the details of their firm. You can do this at the Investment Adviser Public Disclosure (IAPD) website.
You can check both the individual and the firm to view their background and experience details, as well as any disciplinary action taken against them or their firm. Since financial advisors operate in a highly regulated industry, often acting as a fiduciary, there is oversight into how financial advisors conduct business, so running a quick (free) check on them is recommended.
This article originally appeared on Wealth Tender.
Jacob Wade is the budgeting expert who started iHeartBudgets, a place where Millennials and young families come to learn EXACTLY how to build a budget that WORKS. Jacob quit his job in 2018, sold his house and 95% of everything they owned to take off on an adventure of a lifetime and RV around the USA. He is now on a mission to spread the message of Financial Freedom around the country, and help others build a “Freedom Plan” of their own! Also, he has a thing for Doritos…