What are the Costs of Hiring a Financial Advisor?
It takes time, skill, and effort to manage one’s investments and make the right financial decisions as one may have to pay a cost when they delay good financial decisions. One needs to understand that management of finances is a recurring activity where decisions have to be made in a timely manner to better take advantage of good opportunities. For these reasons, you are better off hiring a financial advisor who can guide you along each step of the way.
A financial advisor is best equipped to help you make financial decisions as they have years of education and training, certifications, and experiential knowledge, which enables them to design customized financial plans for you. After assessing your financial profile and your risk tolerance levels, a financial advisor can help you set financial goals that best match your needs. They can advise you on which savings and investment instruments you should invest your money in so that you can have an ideal portfolio suitable for your age and income that can grow optimally with time. Additionally, they can help you reduce your tax liability and debt.
However, one may find the costs of hiring a financial advisor prohibitive in nature. A few of the common concerns include – Is it costly to hire a financial advisor? What kind of fee structure is better – a flat fee or an hourly rate? Are there any other fee models that financial advisors accept? What services do you receive when you hire a financial advisor?
This article delves into the different kinds of costs and charges that are involved in hiring a financial advisor to prepare you in advance for any expenses that you may have to pay in the future. Read below to know more.
Different Kinds of Financial Advisors Who Can Assist You With Financial Planning
Before discussing the costs involved in hiring a financial advisor, let’s find out about the different kinds of advisors and how they can assist you with financial planning:
- Financial planners: Typically speaking, a financial planner helps you grow your wealth and build up a corpus so that you have enough money for the future. A financial planner can assist you in multiple avenues namely, retirement planning, financial planning, investment planning, tax planning, etc.
- Wealth managers: Wealth managers generally tend to work with wealthy investors offering the same services as provided by a financial planner with a focus on the preservation of wealth. Some of the services that they provide include tax planning, estate planning, investment planning, charities and donations, insurance planning, and more.
- Chartered financial analyst: Certified by the Chartered Financial Analyst Institute of America, these professionals advise on the kinds of investments you can make along with their tax benefits. Apart from helping you achieve optimal asset allocation and rebalancing of your portfolio, chartered financial analysts can also assist you with inheritance taxes.
- Chartered financial consultant: The main forte of a chartered financial consultant is expenditure management. Their skills include budgeting, debt management, and helping you achieve the right balance between your saving and spending habits.
- Robo Advisors: Robo advisors are digital advisors that employ computer algorithms to manage investments and savings. One can seek the assistance of a robo financial advisor easily as quite a few firms offer their services. Before receiving financial advice from a robo advisor, you need to provide information related to your income, risk appetite, goals, etc. This enables the robo advisor to crunch the numbers and generate suitable suggestions that are appropriate for your investment and saving goals.
What is the Cost of a Financial Advisor?
Typically, financial advisors can charge fees on an hourly basis, monthly basis, or the amount of income generated by you and the kind of services you require from them. Several advisors charge a fee based on a fixed percentage of the total value of your assets in your investment portfolio. Generally speaking, advisors charge 1 percent of your portfolio size which is the industry average.SPONSORED
Let’s go through the different ways which advisors use to charge fees:
1. Flat rate charges
Some financial advisors charge a flat rate that is typically derived from the estimated percentage of your portfolio size. Flat rate fees tend to start from $1,000 and can go up to $3,000 for one-time consultancy fees for designing an exhaustive financial plan. These fees tend to rise with the size of your investment portfolio. Say, for example, if your portfolio size is around $500,000, a financial advisor can charge you close to $7,500; for an investment ranging between $500,000 and $1 million, you may have to shell out approximately $11,000; and for a portfolio exceeding an investment of over $1 million, be reared to pay anything between $12,500 and $55,000, or more.
Average Annual Fees per Investment Amount for Flat-Fee Financial Advisors
|Amount of Investment||Average Annual Fee*|
|One-time Financial Plan||$1,000 – $3,000|
|Less than $500,000||$7,500|
|$500,000 to $1 million||$11,000|
|$1 million or more||$12,500 – $55,000+|
Several expenses are covered under flat fees such as service fees, planning fees, account set up charges, etc. If you choose to engage a financial advisor who charges a flat fee, you’re paying them to create a comprehensive plan for you that includes setting up your account and creating smart strategies that can tackle market fluctuations. Since these are one-time engagement fees, you will need to monitor and maintain your account yourself.
However, if you wish that your advisor keeps a tab on your progress, monitors your profits or losses, and rebalances your portfolio from time to time to take advantage of market opportunities, then you would need to engage them on a retainer basis. Doing this would be beneficial for you in several ways such as you will have access to timely reports, be able to receive personal financial advice when you require it, and be able to plan adjustments to help you reach your financial goals faster.
If you want to find out where your money is likely to be spent, you can refer to Form ADV that contains information on all fees that a financial advisory firm may charge. It is mandated by the Securities and Exchange Commission (SEC) that every financial advisory firm must register Form ADV with them.
2. Average hourly rate
Some financial advisors charge fees on an hourly rate that can range from $120 and $300 per hour. However, the fees can reach up to $400 per hour and beyond based on the popularity and credibility of the financial advisory firm that you may choose to engage with. To some people, this may seem a costly proposition, but it can be ideal for you if you’re looking to hire a financial advisor for a specific financial service such as estate planning, retirement planning, tax planning, debt management, budgeting, etc. Do keep in mind that the financial advisor does not track or monitor the service meted out by them once the plan has been made and delivered to you. Their job is to simply create a plan of action for you. If you require further assistance on the same, you will need to engage their services for more hours at an hourly rate.
3. Average wealth management fees
Typically charged by wealth managers, average wealth management fees can range anywhere between 0.65% and 1% of the total assets. Wealth managers work with high net worth individuals (HNWIs) who need guidance in making large investments of $250,000 and above. They also assist HNWIs in specialized matters like estate planning, risk management, charities and donations, and capital gains strategies. Do note that the percentage is not determined on the total assets of the individual but the assets value the firm is tasked with managing.
In addition, the percentage charge makes up only one part of wealth management fees. You may also be charged extra fees for opening accounts or to pay for the usage of particular financial tools or platforms.
4. Average financial advisor commission fees
Though a commission fee-based financial advisor does not charge his client fees upfront, a commission cost is incurred whenever the advisor makes an investment for his client. Financial advisors who work on a commission-fee basis earn their commission based on the sale and recommendation of financial products belonging to particular financial firms, insurance companies, or mutual fund houses. The commission charge varies from investment to investment and is dependent upon the kind of financial product you choose to invest in. These commissions do tend to chip away your returns bit by bit and over some time may amount to a tidy sum as well.
Let’s try and understand what we spoke of above through an example. Say, the commission fee for recommending mutual funds falls in the range of 3 to 6 percent. Under AUM, the commissions are dependent upon the total size of your investment, however, the relationship to the commission amount is inverse, meaning that the more you invest, the lower your commission fees will be. Typically, AUM commissions begin around 1.18% and tend to wind down to 0.65% or lower as you continue to invest more.
Average Annual Commissions for Financial Advisors Based on Investment Amount
|Amount of Investment||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%|
Working with commission-based financial advisors can be tricky since they are likely to be motivated by making higher commissions and may recommend products having a high commission rate that may earn them more money. You may receive a suitable financial plan but must also exercise caution when it comes to the products that they recommend. Commission-based advisors may push high-risk products that have a high potential to earn you good returns so you need to be clear about your risk tolerance levels with the advisor at the time of engaging their services so they may refrain from doing so if you don’t wish to invest in products having high volatility. Moreover, a commission-based advisor will execute the buying of the financial product on behalf of their clients, a service not meted out generally by fee-based advisors.
5. Robo advisor fees
Generally considered to be the most inexpensive of financial advisors, a robo advisor is a computer program that evaluates your investment needs using algorithms to create an investment plan for you. The investment plan is designed after careful assessment of various factors ranging from macroeconomics to your finances. A robo advisor is created by a financial advisory firm that helps automate investments and trades, while you exercise control over the amount of investment, the timings or duration of investment, and the final selection of product based on your risk tolerance levels.
You may be charged a management fee of around 0.25% to 0.89% of your total investment or a flat fee of around $10 monthly for hiring the services of a robo advisor. You can get this fee waived off if you maintain a balance of $100 or make monthly $20 deposits in certain financial advisory firms.
Do note that this is only the robo advisor fee. Apart from this, there are other costs involved as well like administration fees, account set-up charges, etc. These charges may crop up under management fees that will be charged over and above the basic robo advisor fee. Even if a particular firm charges 0 percent in management fees, they may still charge you transaction fees every time you make a transaction. In addition, you may be charged custodial fees or fees towards automated tax-loss harvesting along with the standard expense-ratio fee of the mutual funds themselves should you choose to invest in one.
Though the robo advisors may not be governed by a personal motive to make money, they do however lack the personal touch in their services that financial advisors can provide. Since the plans are generated by computer programs, their ability to understand your changing needs is limited. Robo advisors can only offer you recommendations based on the information you provide them and are primarily suitable for individuals who have just started their investment journey.
Let’s take a look at the different fee structures that you can choose from:
|Type of fee||Fee charged|
|Flat rate charges||● Between $1000 and $3000 for a one time plan
● May increase with an increment in the investment amount
|Average hourly rate||● Between $120 to $400+
● Charged on an hourly basis
|Average wealth management fees||● Between 0.65% to 1.65% of the total value of assets
● Charged on an annual basis
|Average financial advisor commission||● Between 1.18% and 0.65 percent
● Charged per investment
|Robo advisor fees||● Between 0.25% and 0.89 percent
● Can be charged on a monthly, annual, or per investment basis
Which Kind of Financial Advisor and Fee Model is the Best for you?
When it comes to picking a financial advisor, you need to take into account several factors such as your age, income, risk, budget, and financial goals. Let’s discuss certain essential points that you must know about each kind of financial advisor based on their fee model that can help you make the right decision:
- Fee-based financial advisors: Since fee-based financial advisors use a flat rate of payment, the costs are redetermined and there is only a minute possibility of any last-minute costs to be added to your bill. You are aware of what you will be paying for and the services that you’ll be paying for. One thing you should keep an eye out for is that fee-based financial advisors can charge based on the total assets that they would be managing which means the higher the value of assets, the higher the fees that the advisor will charge you. It is advised that you engage an advisor ruled by fiduciary standards who will keep your interests above their own and offer you sound financial advice at all times.
- Commission-based financial advisors: A commission-based financial advisor may not be the right pick for all investors. For investors looking to invest for the long-term, a commission-based advisor might be an expensive proposition. Since you’ll be getting charged for each investment tool, the overall costs may turn out to be quite high. Alternatively, a commission-based financial advisor could be the right choice for an investor looking to invest their money for the short term. Moreover, new investors who are in the process of building their investment portfolio may select commission-based professionals since they may not have many investments in the beginning. This is beneficial for you since you’ll be paying per investment and would be able to save any unnecessary costs that you would have had to fork out for long-term annual or monthly fees. In addition, since the advisor would be executing the transaction rather than you having to do it yourself works out to be a positive in the commission-based advisor’s favor.
- Robo advisors: Considered as a low-cost alternative to hiring professional financial advisors, robo advisors charge modest fees and are suitable for individuals belonging to any income group or budget. However, you should know that robo advisors are ineffective when it comes to providing you with a customized plan. Moreover, you cannot depend on them for personalized advice since their recommendations are mechanical in nature and do not consider human emotions that can sometimes influence financial decisions.
Is Hiring a Financial Advisor Worth It?
You may think that hiring a professional for managing your finances and paying them a fee is the opposite of making money, however, it is an important decision that will ensure your overall financial growth. Even if one takes advantage of most of the resources available to them such as financial newsletters, online classes on investing, seminars, etc., it can be nigh impossible to achieve a professional level of knowledge and know-how of the financial world to invest for oneself. In addition, due to various prior commitments, you may not always have the time to discover and identify profitable opportunities to save, invest and grow your funds. For a new investor, activities like timing the market, intraday trading, capitalizing on changing contribution limits, etc. can be a tad overwhelming at first. This may result in you losing out on opportunities that could prove to be immensely beneficial for you. Also, the bigger your estate grows, the harder it becomes to manage it leading you to seek professional help.
A financial advisor can prove to be a source of immense help in several ways such as:
- Retirement planning: Retirement can be a challenging prospect for a lot of folks since you no longer have a regular income to fall back upon. You have your savings and investments accumulated by you during your lifetime that act as a source of financial means for you in retirement. A financial advisor can help you optimize your savings, suggest retirement accounts with the least tax liabilities, flexible withdrawal rules, and steady interest rates to ensure your investments keep growing optimally over the coming years.
- Tax planning: As you build your wealth, the implications of tax on it can be acute. With a rise in your income, you may end up being pushed to a higher tax bracket too. In addition, if you happen to receive a windfall through the form of inheritance may suddenly push your taxable income to higher levels too. This is why it is essential that you have a plan in place that will help you leverage systematic investments, insurance, and other financial instruments that offer tax benefits to you. Herein, a financial advisor can prove to be of assistance as he can help you choose which instruments to pick to save tax without affecting your short-term plans.
- Debt management: If one is not careful, debt can put your long-term financial growth at risk. Paying loans at high interest rates and mortgages can put a big strain on your finances. This also harms your long-term savings and future investments, endangering your future as well. Also, the higher your debt, the lower is your credit score. Having a lower credit score can impact you negatively in several ways such as lowering your chances of getting a new loan, affecting your prospects of employment, etc. You can seek help from a financial advisor who can guide you on short-term money-making investments rather than taking out loans to meet your goals.
- Budgeting: One of the foremost ways to save money is by making a budget and sticking with it. It is one of the basic principles of financial planning that helps you make use of your income wisely rather than squandering it on routine expenses, short-term needs, or family requirements. A financial advisor can assist you with better management of your income, suggest ways on how to lower any unnecessary expenses, invest in fixed-income investments, or instruments with high volatility such as stocks, etc. depending upon your risk tolerance and future goals.
- Portfolio diversification: Diversification helps an investor reduce risk and generate better returns aiding in financial growth and wealth creation. However, you need to be careful to not overdo it and maintain the right level of diversification to reap benefits from this particular strategy. Over or under diversification can negate the effect of this strategy and may even lead to losses in certain situations.
- Portfolio rebalancing: In this strategy, the composition of your portfolio is adjusted to balance the risk quotient and bring it back to its original risk-reward status. Say, for example, your portfolio had risk spread in a 50:50 ratio of stocks and bonds when you started investing. This has changed to 60:40 in the present which means that you may need to rebalance it to bring it back to its original asset allocation considering your risk tolerance level has not changed. A financial advisor can assess your portfolio at regular intervals and suggest changes to ensure that the portfolio does not end up losing its value over time.
By choosing to engage the services of a financial advisor, you can build your wealth, manage your estate, inheritance, debt, taxes, and a lot more with their help. They also oversee your investments, recommend different strategies that meet your existing and future needs and rebalance your portfolio as needed, to ensure that you achieve your financial goals in a timely manner. Consider the cost of hiring a professional financial advisor as an investment rather than treating it as an unnecessary expense. This decision would help you to secure your wealth as well as grow your retirement and savings corpus for the future. To get in touch with a fiduciary advisor who may provide you with financial strategies as per your financial goals and requirements, use Wiser Advisor’s free advisor match tool and get connected with 1-3 vetted financial advisors that may be able to help you.