How Much Does a Financial Advisor Cost?
Updated on Nov 16 2018
Getting finances in order should be a top priority. Many people don’t know where to start when it comes to planning for their retirement, though, and can get overwhelmed with the process. Hiring an expert is a good idea, but the process of hiring a financial planner or advisor can also be a little daunting.
One of the big questions that comes up is: “How much does a financial advisor cost and is it worth it to hire a professional?” Many people opt to do their personal finances themselves, but the investment of hiring an expert often pays for itself as a financial professional is able to navigate the financial marketplace and choose investments and portfolios that produce strong returns.
Educate yourself on how financial advisors are compensated to discover what makes the most sense for you. Here are the most common ways financial advisors and planners charge fees:
1. Percentage of Assets Under Management (AUM)
Many companies follow this model. If you are considering hiring an advisor who is compensated in this way, it is important to understand if they are providing investment management as well as financial planning. There will be a higher charge if they are providing both services.
You will also need to ask a potential advisor who charges this way if they are:
- Commission or fee-based – Advisors who may charge a fee in addition to collecting commissions for the products they sell.
- Fee-only – Advisors with a fiduciary responsibility to act in their clients’ best interest. They do not accept any fees or compensation based on product sales. Often, these advisors are more likely to use low-cost funds in your account, minimizing the overall expenses. These advisors cannot collect commissions.
Since the advisor in this scenario will get a percentage of assets payment as your account value grows, the advisor will make more money. If your account value goes down, they will make less money. In this way, they have an incentive to grow your account and to minimize losses.
This structure can be convenient as fees are debited right from accounts – so no check has to be written and the fees don’t have to come out of the monthly budget. Also, fees debited from IRAs are being paid with pre-tax dollars – which can be great for those in retirement.
A typical asset management fee can range from 2 to 0.5 percent of assets under management per year. Generally, the more assets you have, the lower percentage you can negotiate.
2. Hourly Rate
If you are a self-starter when it comes to your finances and are willing to implement a financial advisor’s recommendation on your own, the hourly rate model is a great option. Financial advisors and managers who follow this model are not responsible for making the changes or putting in place the financial investments or advice they suggest, so they are not tied to the value of the investments or the purchase of an investment; this means you can feel confident you will receive objective advice.
Just like attorneys, or accountants, hourly rates will vary widely based on expertise, certifications and area of specialty. Expect to pay a higher hourly rate for experienced advisors, or advisors who have an area of specialty. Lower rates will be charged by less experienced advisors.
This is one of the most common payment models for financial advisors. You have to be careful with this model as the financial advisor may have ulterior motives to push specific investments if they get a commission. Basically, their advice can be influenced by the way they are compensated.
Make sure you ask a potential financial advisor for a clear explanation of how they are compensated and whether they receive commissions if you buy the investments or products you recommend. Keep in mind that commissions can take the form of a surrender charge on an annuity, front-end sales load charged on a mutual fund, or as a payment directly to the advisor from the investment company in a non-publicly traded REIT.
4. Fees and Commissions
Many advisors collect a combination of fees and commissions, also known as term fee-based. These advisors have their own model of how they are compensated, so make sure to ask for a breakdown of their costs, both fees and commissions, so you understand where the charges are coming from.
5. Flat Fee, by Project
Another advisor compensation method is to pay a flat fee for a specific project. For example, if you are looking specifically for a retirement plan, it may make sense to pay a flat fee to have someone else analyze your financial situation and crunch the numbers, and then you can take that information and decide on your next approach. Advisors with specialties often charge flat fees to help you understand all the moving parts and how the investment works with your retirement time horizon. Since a flat fee is not tied to the value of investments, or generated by the purchase of any specific investment, you can feel confident you will receive objective advice. Make sure the fee is quoted upfront, along with a clear description of the services that will be provided.
6. Retainer Fee
If you have a more complex situation, such as ongoing stock options to be exercised, a small business, rental properties, or a need for regular income from your investments, then you may benefit from paying for ongoing advice with the retainer fee model.
Since a retainer fee is not tied to the value of investments, or generated by the purchase of any specific investment, you can feel confident you will receive objective advice. A potential advisor should be able to tell you the following:
- What the retainer fee is
- Whether it’s quarterly or annually
- The services you get by paying that fee
Ask Your Potential Financial Advisor for a Detailed Explanation
The compensation method that works best for you depends on your unique situation. For example, if you are buying an investment that you plan on holding for a long time – and will not need ongoing advice, paying a commission may be the most cost-effective method. However, if you have the desire to have someone readily available to update your financial plan and address ongoing questions, a fee structure might be optimal. If you need specific one-time advice for retirement or an investment, you might look for an advisor who charges a flat fee, by project.
The key is that you understand what you’ll be charged for the services you’ll be receiving from the financial advisor. Remember to ask the potential advisor for a clear explanation of how he or she will be compensated and choose some who provides an honest and straightforward answer.
Here are more questions to ask potential financial advisors to make sure you’ve done your due-diligence. After all, peace-of-mind is important when choosing someone you can trust with your finances.
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