Investors often hesitate to hire a financial advisor because of the costs involved. The hesitation is often due to the concerns about the fees charged by the advisor, the fee structure used by them, a lack of understanding of the fee model, and the financial services they should receive for the money they spend on hiring the advisor. Additionally, finding the right financial advisor requires a lot of time and effort. Managing one's finances is also not a one-time decision or activity, but is something that requires consistent oversight and monitoring. Hence, it is advised that you consider hiring a professional financial advisor who can guide you on your financial journey. Research has shown that those who hire a financial advisor tend to gain more wealth over time than those who do not.
In this article, we will discuss the various fees and costs involved in hiring a professional financial advisor, so that you can engage with an advisor that is best suited to meet your financial needs.
How does a financial advisor charge for his/her services?
Financial advisors use several compensation methods to charge for their services. The charges may be at an hourly fee, a flat fee, via commissions, or a combination of each. They may also charge a fee by how much money they manage for you i.e., through the assets under management (AUM) method. The latter is the most popular method used by advisors across the industry.
Understanding advisor compensation/fee structures:
1. Flat fee
Under a flat fee structure, the advisor charges a fixed amount of money for any services rendered for a specific duration. You can consult with the advisor as many times as you want during this engagement period. For example, advisors who charge a flat fee can offer an annual quote to their clients where they provide financial counsel for the whole year. Typically, the professional charges a fee between $1,000 and $3,000. There are a number of different expenses covered under flat fees such as service fees, account setup charges, account maintenance charges, etc. Since you will be only paying a one-time consultancy fee, the advisor will not monitor your account. You will have to maintain your account yourself, keep track of your investments, and rebalance your investment portfolio as and when required.
2. Hourly fee
If you are a new investor, the hourly-fee model may be more suitable for you. Under this model, you are charged a fee on a per-hour basis by the advisor. You have the option of hiring the advisor for an hour, or increasing the duration as per your needs. Generally, the rate for an hourly-fee advisor ranges between $200 and $400 per hour. Based on the expertise of the advisor you choose, they may charge more than $400 too. You can use this time to ask them for any financial assistance you require, such as retirement planning, debt management, estate planning, budgeting, tax planning, investment planning, etc. Similar to the flat fee model, the advisor does not offer any account monitoring services once the financial service has been provided. If you require further assistance, you will need to hire their services and pay by the hour again.
3. Assets under management (AUM) fee
Under the AUM fee structure, advisors charge a percentage of the total dollar amount of the assets they manage for their client. Advisors most commonly charge at least 1-2% of AUM for financial services. For example, if your advisor manages $500,000 on your behalf, they might charge you anywhere between $5,000 and $10,000 for their services. However, with an increase in your AUM, some advisors lower their fee percentage, for instance, 1% for AUM $1 million, 0.75% for AUM $3 million, 0.5% for AUM $10 million, etc. Do note that you may have to pay extra fees in addition to the fee percentage charged by the advisor in the form of account setup charges, usage fees for particular financial tools or platforms, etc.
Hiring a financial advisor that uses an AUM fee structure may be more expensive than other advisors; however, since advisors receive a percentage of the clients' assets that they manage, they have an interest in managing their clients' portfolios very well, making this a less risky option for clients.
4. Commission-based fee
A commission-based financial advisor receives a compensation or fee through the sale of financial products to their clients. They earn this fee when their clients make a financial transaction that they recommend, such as buying a stock or other financial assets. For example, a commission-based advisor can earn a commission between 3% and 6% for recommending certain stocks or products that their clients purchase on their recommendation.
Below are the average annual commission percentages commission-based advisors charge their clients, based on the amount the client invests with them:
Average Annual Rate of Commission for Financial Advisors Based on Investment Amount
|
Investment Amount |
Average Annual Commissions* |
|
Up to $50,000 |
1.18% or $590 |
|
Up to $100,000 |
1.12% or $1,120 |
|
Up to $150,000 |
1.09% or $1,635 |
|
Up to $250,000 |
0.65% to 1.07% or $1,625 to $2675 |
*Estimated Percentage
Note that some commission-based advisors provide financial services or advice to their clients as a secondary service to recommending or selling financial products. Hence, they may have a conflict of interest with their client, since they may recommend financial products that may not always be in the best interests of their clients.
5. Robo-advisor fees
Considered to be one of the least expensive kinds of financial advisors, a robo-advisor is a digital platform that provides financial planning services without any human intervention. It evaluates your financial needs using algorithms and invests your money by using passive index investing strategies. In addition, you can execute trades yourself sitting in the comfort of your home. You determine the amount of investment, your investment horizon, and the financial product based on your risk appetite.
Most robo-advisors charge a fee between 0.25% to 0.50% of your total investment or a flat fee of $3–5 per month. This fee may be waived if you maintain a certain monthly account balance or meet a certain monthly threshold. The above fee is exclusive of other charges such as administration fees, account set-up charges, etc., that may be charged over and above the basic robo-advisor fee.
Why hiring a financial advisor is a cost-effective investment
For many people, hiring a financial advisor may seem like an expensive proposition. However, it may be difficult to DIY your finances. Despite the easy access and availability of financial resources such as financial newsletters, online classes on investing, seminars, etc., it would take years to amass a professional level of knowledge and build expertise to invest for oneself. Moreover, due to personal and professional commitments and responsibilities, you may not be able to devote enough time to identify profitable opportunities to save, invest and grow your money and may miss out on such opportunities. A financial advisor can help you save money for retirement, manage your taxes and debt, create a budget and a well-diversified investment portfolio, and manage your wealth.
If you wish to read about financial advisors and what they do in detail, you can read more about them here.
To conclude
A financial advisor may be an effective partner to your financial journey and highly beneficial in helping you attain your financial goals. He or she chooses investments that can help grow your wealth, helps manage your estate, taxes, inheritance, debt, etc., monitors your investments, recommends different strategies that match your present and future financial needs and rebalances your portfolio as and when needed, and more. Instead of looking at the cost of hiring a financial advisor as a challenging expense, consider viewing it as an investment that will allow you to build your wealth and accumulate enough funds to live comfortably.
If you are looking for a qualified financial advisor who can guide you on how to effectively manage and grow your finances, use the free advisor match service to find highly vetted fiduciary advisors. Answer a few questions about yourself and get matched with 1-3 financial advisors that are suited to meet your financial requirements.