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When it comes to financial advice, what you pay can vary based on what you get. An advisor who simply sets you up with a passive S&P 500 index fund might not be worth a 1% fee, while an advisor who helps you manage taxes and cash flow, plan for retirement and save for your child’s college education is likely worth significantly more.
For example, say you have $1.7 million invested with a financial advisor. A 1% fee is within the average range for the industry, but whether you’re getting a good deal will depend entirely on your advisor’s skill and services.
If you’re interested in working with a financial advisor but don’t know where to start, try SmartAsset’s free tool to connect with fiduciary advisors who serve your area.
Financial advisors have several different ways of structuring their fees. The most common types of fees are:
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Hourly: A fixed rate that’s charged for every hour worked.
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Fixed: A predetermined amount that you pay for a specific service.
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Percentage of AUM: A variable rate based on a percent of the total assets under management (AUM), typically billed annually or quarterly.
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Commissions and performance fees: Commissions are fees your advisor receives for specific trades or transactions they make, while performance-based fees apply when they meet certain goals.
Today, fees that are based on a percentage of a client’s AUM are the most common type of advisory fee. A 2022 study by Kitces found that AUM fees were the majority revenue source for 82% of financial advisors surveyed. Here’s how they work: say for example that an advisor charges 0.5% annually and they manage a $100,000 portfolio. At the end of the year, you would have paid $500 ($100,000 * 0.005) in management fees, which may have been taken directly from your account.
Fixed and hourly rates are more common for advisors who perform specific services. For example, if a financial advisor does your taxes or makes a plan for college savings, they may bill by the hour or charge you a flat rate for those services.
But if you need help finding a financial advisor, consider matching with one using this free tool.
Financial advisors can provide a range of services.
Flat- and hourly-fee structures are generally built around specific deliverables. For example, some advisors will help you to create a tax strategy, a household budget or an overall financial plan. It’s also common for a financial advisor to offer a comprehensive range of financial services based on what you need to achieve.
AUM-based fees are typically associated with ongoing portfolio management. Advisors who manage client portfolios typically select investments, moving money according to a pre-determined strategy. Percentage-based fees seek to align your advisor’s incentives with your own. The more they grow your money, the more assets they will have under management and, in turn, the larger their fee can potentially be.
That said, higher fees do not always translate to better results. As a prospective client, you should carefully review what you receive for your money. If you want comprehensive financial services, how much does the advisor charge for each deliverable? If you want money management, how have their portfolios performed year-over-year? Make sure you’re getting value for your money because even small percentage fees can add up.
Whether you need ongoing portfolio management or standalone financial planning, evaluate those needs and then connect with a fiduciary financial advisor who offers those services.
The typical percentage-based fee that’s often cited is 1% of AUM, although an AdvisoryHQ analysis found that average fees for portfolio management range from 0.59% to 1.18% of AUM. The exact rate you’ll pay can depend on several factors, including the services bundled within that fee. For example, a financial advisor might charge more if the AUM fee also includes tax preparation and financial planning, while they might charge less if the fee only accounts for portfolio management.
Robo-advisors, digital platforms that manage your portfolio automatically using an algorithm, tend to be significantly cheaper. These services generally charge between 0% to 0.89% percent of assets under management, according to Robo Adviser Pros. However, they also offer fewer services. A robo-advisor will manage your portfolio around specific metrics, but generally can’t offer customized advice or services like financial planning and tax advice.
For a wealthy household, it’s also important to consider asset-based discounts. Many financial advisors use graduated fee schedules with lower rates that apply to larger sums of money. For example, an advisor may charge a 1.5% fee on the first $250,000 in a portfolio and a 1% fee on the next $250,000. That advisor could charge just 0.75% to manage the next $500,000, meaning a $1 million portfolio woul qualify for a discount based on its sheer size.
If you have $1.7 million and are paying 1% in advisor fees, ultimately it’s important to ask what you’re getting for your money. This fee adds up to $17,000 per year, which may be reasonable given the level of service you receive and your satisfaction with the advisor.
If you currently have an advisor but want to find a new person to work with, this free tool can help you connect with a fiduciary advisor who serves your area.
On average, financial advisors charge between 0.59% and 1.18% of assets under management for their asset management. At 1%, an advisor’s fee is well within the industry average. Whether that fee is too much or just right depends entirely on what you think of the advisor’s services and performance.
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Is it worth paying a financial advisor 1%? This small percentage really can add up to a lot of money over time, so make sure to review what you’re getting from that relationship in exchange for these fees.
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Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.
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The post I Have $1.7M Invested With My Advisor and I Pay a 1% Fee. Am I Paying Too Much? appeared first on SmartReads by SmartAsset.
