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Many people hire a financial advisor to gain guidance for a specific situation — a new job, an impending retirement, an unexpected windfall or an expected inheritance. But few have answers to some vitally important questions when seeking financial advice, like how much does a financial advisor cost, and how much should their fees be.
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How much does it cost to hire a financial advisor?
Financial advisors’ fees are wrapped up in the types of qualifications they have, the services they offer and how their firms operate. It’s not simple, and it’s certainly not straightforward. You’ll need to gather some key facts before you ask an advisor about their fee structure. Then, you’ll want to monitor the cost of the advisor you hire to ensure that you’re getting your money’s worth.
Advisors are responsible for ensuring that their clients know and understand how they earn their compensation, said Lisa L. Martin, a lecturer with the financial advisory program at North Carolina Agricultural and Technical State University. “Transparency is a real thing. You should be open to providing that knowledge to your clients so they understand what’s going on.”
And, transparency works both ways. If you’re prompted to find an advisor to gain direction for an immediate financial decision, realize that the advisor will need to put your urgent question in context, said Martin.
When a fiduciary advisor needs more information and recommends specialized advice or long-term strategies, they’re looking out for you. “Everything is interlinked,” she said. “You need to understand the full picture.”
Types of financial advisor fees
Financial advisors’ fees fall into three basic categories: flat fees, a percentage of assets under management (AUM) or a blend that includes commissions.
Flat fee model
With a flat fee model, the advisor charges you for the work they do. The work might include reviewing your financial situation and goals, mapping saving, investing and spending plans, and recommending specific types of investments and investment accounts as well as giving an overview of the tax implications of various decisions. For instance, taxes often apply specifically to income you pull from various types of retirement accounts.
AUM model
In an “assets under management” model, the advisor takes a slice of the money — the assets — that you have in investment accounts that the advisor oversees. A common rationale for the AUM model is that when the portfolio grows, the advisor takes a little bit of the additional return you are gaining.
Nearly all registered investment adviser (RIA) firms received at least some compensation from this type of model in 2022, according to the Investment Adviser Association (IAA)’s latest industry snapshot:
Source: 2023 Investment Adviser Industry Snapshot
However, your portfolio could go down, warned Joseph Maugeri, managing director for corporate relations for the Certified Financial Planning Board of Standards. “And you’re still paying a fee,” he added. “The way to think about it is, what is the advisor doing when the portfolio goes up and down — what value do they add? You want to make sure that the portfolio is always aligned with your financial goals and your level of risk,” he said. “What value are you getting for the fee beyond the advisor’s costs? There should be value that is measurable.”
Assets at RIA firms have generally been on the rise over the past two decades but declined in 2022 for the first time since the great financial crisis “as a result of market conditions,” according to the IAA:
Blended model
Finally, some advisors and advisory firms blend fees and commissions, depending on the types of financial products they sell. In that case, Maugeri recommended asking how the advisor or firm makes the majority of their income. Just because they can charge commissions doesn’t mean that they do. Or perhaps someone else in the firm actually sells the commission-based product, so the income goes to the firm’s overall profits, not just to your advisor.
Data compiled by the IAA show that it’s common for RIAs to blend fixed or hourly fees with AUM-based fees:
Source: 2023 Investment Adviser Industry Snapshot
One overriding goal that a fiduciary advisor shares with clients is that the clients’ financial health justifies the fees, said Maugeri, a certified financial planner himself. How you define “health” helps determine the type of fee that works best for your situation.
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Financial advisor fees by service
The term “financial advisor” is used by a lot of finance company employees, including some insurance agents, but genuine financial advisors have two key qualifications.
Fiduciary responsibility
First, they must put their clients’ interests first. “Fiduciary responsibility” is the obligation that an advisor has to do what’s best for you, the client, even if that advice doesn’t make money for the advisor. For instance, a fiduciary advisor might recommend that you put your money in a certain type of guaranteed-income retirement vehicle even if the advisor doesn’t sell that vehicle and won’t make any money if you buy it from someone else.
Ascertaining fiduciary status is an early and critical fork on the road toward exploring advisor fees. Ask the advisor you are considering if they are a fiduciary. They should answer plainly if they are or are not. Stockbrokers and insurance agents still might offer products — on a commission basis — that fit your financial needs, but if they are not fiduciaries, they are not obligated to put your financial best interest before their own.
Fiduciary status tees up the second qualification.
Certifications and licenses
Financial advisors who are fiduciaries almost always hold any of several certifications or licenses that require them to be fiduciaries.
Certified financial planners, chartered financial consultants, investment advisor representatives and personal financial specialists (accountants who’ve gained additional training in financial advisory) work hard for their qualifications, so they aren’t shy about listing their CFP, CFC, IAR or PFS status in their website bios. These qualifications shape how much it costs for an advisor.
Importance of a financial advisor’s fee structure
To compare fees across compensation structures, gather information from both flat-fee-based advisors and those that charge according to how much money they manage for you.
Industry research indicates that the standalone fee for a basic financial plan prepared by a CFP starts at about $2,400. The more complicated your needs, and the closer you are to retirement, the more a plan will likely cost. And, of course, a financial advisor’s basic plan does not include fees charged by related specialists, such as tax accountants or retirement-income specialists.
The fee scenario is more complicated when it comes to an AUM model, in which advisors take a small piece of your portfolio’s value as their commission.
The industry-wide average fee for managing a client portfolio of $750,000 is 1.04%, said Donnie Ethier, senior director, wealth management research & consulting at industry research and consulting firm Cerulli Associates. Advisors charge a smaller proportion as the portfolio grows: about 40% less for a portfolio of $10 million, said Ethier.
Advisors agree that for people just starting out (whose financial planning needs are simple) a basic plan for a fee is a good place to start. At the very least, you can build in triggers for events that warrant additional financial guidance, such as starting to save for childrens’ college educations, starting a business or figuring out how to handle an inheritance.
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Robo-advisors versus traditional human financial advisors
Algorithms can be an investor’s best friend, especially for those who are young or with uncomplicated financial needs and goals, or both, said Maugeri.
Robo-advisors are online financial services companies that offer automated advice based on very common financial situations and ambitions. They offer a clear slate of costs for various types of advice and accounts, which simplifies the question of how much financial advisor fees should be.
If you need personalized advice, digital advisory services can refer you to human advisors who are happy to step in and take over, using the robo-advisor’s records and reports as a starting point for your conversation.
Additional financial advisor costs to consider
As Martin said, all financial costs are connected. When you face special circumstances, such as a big bonus or a divorce, you will need an advisor who has both empathy and access to the experts you need to navigate the situation. Usually, fiduciary advisors have good relationships with tax accountants, estate lawyers, counselors and other professionals who can add expertise as needed.
Also, some investments and financial decisions invoke tax complications. Taxes are not fees paid to the advisor, but they are often a foreseeable consequence of various decisions. A comprehensive financial plan explores tax implications. The more complicated the tax scenario, the more likely it is that you and your advisor will need to also work with a tax accountant.
How to reduce financial advisor fees
The more money you have, the more you can negotiate fees, said Maugeri. Typically, an advisor who charges a percentage of assets under management will charge a lower percentage for managing bigger portfolios, because a larger base amount supports a healthy fee.
If you are in financial distress, you might be able to find a fiduciary financial advisor who does volunteer work locally for a reduced fee, or no fee at all. Contact your local chapter of the Financial Planning Association to find out about such programs.
Are financial advisors worth the cost?
Maugeri and Martin agree that the ultimate goal is for a financial advisor to cost less than what you gain.
If your main goal is to grow your investments, the calculation is elementary, said Martin. Subtract the fee from the amount that you have gained due to the advisor’s guidance. The difference is the return on investment in the fee.
But when an advisor brings invaluable expertise and coaching to your ever-evolving financial situation and goals, that return on investment includes intangibles, such as the confidence that you are on the right path.
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Frequently asked questions (FAQs)
Financial advisors typically offer a spectrum of financial planning advice: investment guidance (what to invest in and how) and, depending on their expertise, advice for special circumstances (like transitioning to retirement).
Solid advice abounds for those who can’t afford a fee. Check out the local chapters of the Financial Planning Association to find out about advisors who do community service by providing free consultations.
The CFP Board offers these detailed introductory articles about working with financial planners:
Some advisors charge a flat fee for creating a custom financial plan. Others take a slice of the money in your investment portfolio. And some take commissions for selling you certain types of financial or insurance instruments. Always ask if an advisor is a fiduciary, which means that the advisor is committed to doing what’s right for you, even if they don’t make much or any money from that recommendation.
Advisors that take a slice of the money in your portfolio typically set a minimum size for the portfolio. Often, that is $250,000 — an amount that delivers a minimal income to the advisor for their work. Fee-based advisors charge depending on the type and complexity of plan that you need, but usually don’t require a minimum for the assets you have or the amount of money you make.