Is Paying a Financial Advisor 1% Worth It?

Key points

• Financial advisors help you manage your money and prepare for your financial future.
• They can earn advisory fees or commissions on the products they sell.
• Robo-advisors are a low-cost alternative if you don’t need personalized guidance.

A financial advisor can be a great expert to have in your corner. But these professionals don’t necessarily come cheap. You can expect to pay an annual or hourly fee for their services. This raises the same question you should ask of any purchase: Is it worth the cost?

Paying an advisor can be worth it if you get enough value to justify the cost. But determining whether this is the case can be easier said than done.

What do financial advisors do?

Financial advisors help you manage your money and prepare for your financial future. 

“Their goal is to help clients answer the question ‘Am I going to be OK?’” said Chris Beard, a certified financial planner and managing partner at Professional Planning and Wealth.

The services an advisor provides to help you answer that question will vary. They can include any or all of the following:

• Financial planning. Advisors, particularly those who call themselves planners, help you create a comprehensive financial plan. This plan typically includes guidance on all areas of your financial life, present and future. Think of it as a road map.
• Investment management. Some advisors only provide investment recommendations, while others also manage your portfolio.
• Tax planning. Advisors help you optimize your tax strategy. Some coordinate with an outside tax professional. 
• Retirement planning. Advisors help with retirement planning, including saving, investing, budgeting and spending.
• Long-term care. Long-term care planning is part of retirement planning. Many retirement advisors help you plan for long-term care costs.
• Estate planning. Advisors help you create a plan for transferring your property when you die. 

How do financial advisors get paid?

Financial advisors get paid in two main ways: through fees and through commissions. But these payment schemes can take various forms. Here are the different ways advisors get paid:

• Assets under management fees. Advisors can charge a percentage of the assets they manage. For example, you may pay 1% of your total balance per year. This fee is typically deducted quarterly. So you’ll pay 0.25% per quarter.
• Hourly fees. Advisors can also charge by the hour for their services. They bill you for the time they spend working with you or on your accounts.
• Flat fees. Some advisors charge a flat fee for a particular service. For example, you may pay $2,000 for a comprehensive financial plan. But you’ll receive no ongoing guidance after the plan is complete.
• Commissions. Advisors can also earn commissions on the products they sell. This is most commonly seen in life insurance and annuities. But even mutual fund companies can pay advisors for referring clients.

Some advisors get paid through a combination of the above. Those who earn both fees and commissions are called fee-based advisors. Those who don’t earn commissions are called fee-only advisors.

Typical financial advisor costs

Financial advisor costs vary. You can expect to pay a higher fee for a broader range of services. But this fee may decrease as your account balance grows. Assets under management fees are typically on a sliding scale. Higher balances may qualify for lower fees. But flat fees may increase with larger account balances to compensate for the greater complexity.

Here are the average advisor costs, according to AdvisoryHQ:

Average financial advisor costs

Remember that you’ll also likely pay a fee for the investments you use. For example, mutual funds, exchange-traded funds and annuities can also have fees. And some firms charge trading commissions when you buy or sell an investment. 

Is it worth paying a financial advisor 1%?

Now it’s time to answer the real question: Is a financial advisor worth the cost? 

A 1% fee is reasonable if you get more than 1% benefit. But performing this cost-benefit analysis may be more complicated than it appears, as advisors do more than help you generate investment returns.

Much of the value that advisors can provide are services that are hard to quantify.

Chris Buoncore, senior wealth advisor at MAI Capital Management

For example, how do you put a dollar amount on peace of mind? Advisors provide this key value. They help ensure your finances receive the attention they need.

Vanguard believes advisors add value through relationship-oriented services rather than by trying to outperform the market. According to the firm, the total annual value of these services can add up to or exceed 3% per year. But only you can determine if this holds true for you. Do you think you get enough value from the relationship to justify the cost?

Can I manage my money alone?

You can manage your own money. “There has never been a time with more options available for DIY investors,” Beard said. But the consequences of doing so might not be worth it.

A financial advisor can help you in ways you may not be prepared for. For example, they can suggest course corrections if you drift off track or identify blind spots in your plan. And you can’t ignore the benefit of a sounding board when making tough financial decisions.

There is one key question to ask yourself when deciding if you should go it alone, Beard said: “(Can) you stay on track for the long term if anything unexpected should arise?”

Robo-advisors vs. financial advisors

Robo-advisors make getting financial guidance easier and cheaper than ever. Many charge roughly between 0.25% and 0.50%, while others charge no management fee. This is much lower than the average fee for a human financial advisor.

Robo-advisors manage your investments using prebuilt portfolios. This may be all you need if you’re just starting to invest or have a simple financial situation. But you may want more personalized guidance as your wealth grows and your finances become more complicated. Some robo-advisors offer access to human advisors. They usually require a higher fee, though.

Knowing the following key differences between robo-advisors and financial advisors is important:

• Cost. Robo-advisors are less expensive than human financial advisors and provide many of the same investment management services. So robo-advisors may be a better choice if you want only investment services.
• Products. Robo-advisors typically build portfolios from a limited menu of investment options. You can likely get more diverse offerings from a human financial advisor.
• Personalization. Computer algorithms create robo-advisor portfolios. They consider only the factors built into their equations. A financial advisor can provide a more holistic and personalized approach.
• Guidance. A robo-advisor can’t be your sounding board when the going gets tough. Even ChatGPT doesn’t converse on the same level as a human.
• Conflicts of interest. Human financial advisors may face conflicts of interest. This could lead them to suggest strategies that benefit their bottom line more than yours.

How to choose a financial advisor

Choosing a financial advisor is a personal decision. The right advisor for one person may not be the right advisor for another. Here are the steps for choosing an advisor.

Step one: Determine the services you need

You can’t choose an advisor until you know what you need. Advisors provide a range of services. Some specialize in a particular area, such as retirement planning or investment management. List the areas where you want help so you can find an advisor to provide that assistance. 

Step two: Check the advisor’s credentials

Anyone can call themselves a financial advisor, as there is no legal definition. A better way to verify an advisor’s expertise is through their credentials. For example, a CFP must meet education, exam, experience and ethics requirements. You can check an advisor’s industry licenses on BrokerCheck by the Financial Industry Regulatory Authority. 

Step three: Ask questions

You should meet with multiple financial advisors before choosing one. This will help you compare services and costs. Ask each advisor about their approach and how you would work together. Most importantly, ask yourself if the advisor is someone you can trust. Technical skills are essential. But many people have them. 

“Finding someone who will tell you what you need to hear and not what you want to hear is the harder quality to find,” Buoncore said. 

Step four: Decide if the services are worth the cost

The last step for choosing a financial advisor is determining if their services are worth the price. Be sure to ask exactly what it will cost you to work with the advisor. Then, decide if the cost is worth it and within your budget.

Bottom line

Financial advisors can provide a lot of value. But they can also charge hefty fees. Only you can determine if an advisor’s fee is worth the cost. Sometimes, saving money by using a robo-advisor or going it alone makes sense. Other times, paying for the peace of mind only a human can provide is worth it. 

Frequently asked questions (FAQs)