What is the cost of a financial advisor?
When it comes to personal finance, the guidance of a financial advisor can help you in more ways than one. These experts have the necessary financial knowledge and expertise to help you make informed decisions about your money, investments, and future financial security. However, the big question that looms in the minds of most investors seeking professional advice is regarding the cost of a financial advisor. Financial advisors charge a fee for their services. While this cost might initially seem like an additional expense, shifting your perspective and viewing it as an investment rather than a financial burden is essential. The value they bring to the table often outweighs the price, leading to improved financial outcomes and peace of mind.
Different financial advisors may have varying fee structures, and their range of services can also differ significantly. In this article, we will discuss the different types of financial advisor fees and compare costs and services offered to find an advisor who aligns with your budget and financial goals.
The cost of a financial advisor based on their fee-model
While seeking the guidance of a financial advisor is highly advised, it is essential first to understand the different types of professionals you can hire. Not all financial advisors are the same, and understanding the different types of advisors is crucial in making an informed decision about whom to entrust with your financial well-being. Knowing the types of financial advisors and their compensation models can empower you to select a professional whose approach aligns seamlessly with your financial goals, risk tolerance, and overall budget.
Below are the different types of financial advisors you can choose from based on their fee model:
1. Fee-only financial advisors
Average cost: $200 to $400 an hour/ $1,000 to $3,000 per plan/ 1.18% to 0.59% of AUM
Fee-only financial advisors are professionals who do not receive commissions from selling financial products. Instead, they charge fees directly to their clients for the services they provide. These fees can be based on various methods, such as an hourly rate, a flat fee for specific projects, a percentage of Assets under Management (AUM), or a combination of these approaches. The absence of commission-based compensation reduces potential conflicts of interest, making fee-only advisors more focused on delivering objective advice tailored to your financial goals and best interests.
Choosing a fee-only financial advisor offers several benefits. Since these professionals are not driven by commissions, you can have peace of mind knowing that the recommendations they offer are unbiased and solely intended to benefit your financial interests. This can foster a stronger sense of trust in the advisory-client relationship. They can offer personalized financial planning, comprehensive investment management, retirement planning, and tax optimization, among several other things.
Moreover, fee-only advisors are often viewed as fiduciaries, which means they are legally obligated to act in their client’s best interests. A fee-only fiduciary financial advisor has a fiduciary duty to put the client’s needs first, ensuring you get the highest level of transparency.
It is also important to know the potential drawbacks of hiring a fee-only financial advisor. Due to the direct nature of their compensation, fee-only advisors might be more expensive upfront. This might be concerning if you have a smaller investment portfolio or seek one-time financial advice. Having said that, the fees charged can vary widely based on the advisor’s experience, expertise, and location, and you can easily find a professional who fits your budget.
2. Fee-based financial advisors
Average cost: 3% to 6% of the investment + flat fee
Fee-based advisors are financial planners who receive compensation from both the client and commissions from investment providers. Fee-based investments encompass a wide range of financial products, such as annuities, mutual funds, stocks, bonds, and other securities. When you purchase any of these assets, the financial advisor receives a commission from the sponsoring company, which helps them earn money. Some fee-based advisors may charge an annual flat percentage for all their financial services, regardless of whether they earn commissions from recommending fee-based investments or not. This makes it essential for you to clarify the compensation structure of the financial advisors before hiring them.
One of the key benefits of fee-based advisors is the possibility of a more comprehensive range of services. These professionals can provide financial planning, investment management, and other advisory services to offer you a holistic approach to financial planning. In addition to this, they also recommend up-and-coming products across asset classes that can help you stay informed and up to date with changing market conditions.
However, there are certain drawbacks to be aware of when working with fee-based advisors. There may be a potential for conflicts of interest, as these financial advisors may prioritize investments that earn them higher commissions than those that align with your best interests. This can undermine trust in your association, making it hard to rely on their advice. Additionally, the dual payment structure can create ambiguity and uncertainty. It can also lead to conflicts of interest. For example, a fee-based advisor may recommend a particular annuity product to you due to the attractive commission offered by the annuity provider. Although the annuity may not be the most suitable option for your risk appetite and long-term financial goals, you will earn mediocre returns, and the advisor’s financial incentive will overshadow your needs. This downside can be mitigated by seeking a fee-based advisor who is a fiduciary, as they are legally obligated to work in the client’s best interest. A fiduciary advisor’s primary focus is on providing recommendations that align with your specific financial situation and goals, minimizing the potential for conflicts of interest. This higher standard of care can enhance trust and transparency in the advisor-client relationship.
3. Commission-based financial advisors
Average cost: Between 3% and 6% of the investment
Commission-based financial advisors earn their income primarily from the products they sell or the accounts they open for their clients. This means their compensation is directly tied to the transactions they complete or the number of accounts they initiate. The products offered by commission-based advisors often include financial instruments like insurance packages and mutual funds. The more clients they convince to purchase these products, the higher their earnings. These advisors may earn commissions through various means, including upfront sales fees or loads on mutual funds, commissions and surrender charges from annuities, insurance policies, etc., trailing commissions like 12b-1 fees, etc.
There is often confusion between choosing fee-based or commission-based financial advisors. One of the critical advantages of commission-based advisors is that they charge nothing to their clients, as their income comes solely from commissions. On the other hand, fee-based advisors charge a flat fee for their services, which could potentially be more expensive. However, commission-based advisors do have a potential bias toward recommending products that generate higher commissions for themselves rather than focusing solely on the client’s best interests.
4. Hourly rate financial advisors
Average cost: $200 to $400 an hour
As the name suggests, an hourly rate financial advisor charges clients based on the time they spend providing financial advice and services. They can be ideal for clients seeking one-time advice without committing to long-term contracts or higher fees. These advisors may also offer more transparency as you know precisely what you are paying for. The duration, services, and advice are more or less pre-determined before you go into a meeting, and there is little scope for being overcharged.
Hourly rates can vary depending on the financial advisor’s experience, expertise, and location. Moreover, you have the flexibility to engage with the advisor on a need-to-need basis. For instance, if you’re approaching retirement and need help optimizing your investment portfolio for sustainable income during retirement, you can schedule an hourly session with a financial advisor specializing in retirement planning. This way, you only pay for the time and advice you require rather than a fixed fee for ongoing services that may or may not align with your immediate needs.
For clients with more complex financial needs or ongoing financial planning requirements, the cost of multiple hourly sessions might be higher when compared with other compensation models. In this case, hiring an hourly-rate financial advisor may not be the best course of action.
5. Flat-rate financial advisors
Average cost: $1,000 to $3,000 per plan
Flat-rate financial advisors charge a fixed fee for specific financial services, depending on the time spent on the engagement. Similar to an hourly rate, this compensation model offers transparency and predictability, as clients know the cost of the services they will receive upfront. Flat fees can usually vary depending on the complexity of the advice, the duration of the association (annual, quarterly, monthly), and the financial advisor’s expertise.
One of the greatest benefits of working with a fixed-fee financial advisor charging a flat rate is that you can easily fit them into your budget. There is no need to worry about hourly rates or fluctuating fees. For example, if you need assistance for up to a year with creating a comprehensive financial plan, the financial advisor may quote a flat fee for the planning process, regardless of the number of meetings or hours spent working on it within one year. Such an association can give you peace of mind, knowing that you will receive the necessary financial planning expertise without any surprise costs. Flat-rate advisors are also quite flexible in service options and allow clients to choose specific financial planning services. They then tailor the engagement to their requirements.
6. Robo advisors
Robo advisors are automated digital tools that run on algorithms. These advisors offer financial advice and investment management based on advanced algorithms and your input. They ask you for your age, income, risk tolerance, financial goals, and time horizons and create an automated plan of action to meet your requirements. Robo advisors eliminate all forms of human interaction and offer a cost-effective option for investors with smaller portfolios.
One of the main benefits of working with a robo advisor is the accessibility and convenience it offers. You can sign up and create an account online, answer a few questions, and receive portfolio recommendations within minutes. Robo advisor fees also tend to be lower compared to traditional human advisors. But a thorough robo advisor fee comparison is essential as different platforms may offer different plans. Furthermore, robo-advisors offer a disciplined and systematic approach to investing. They depend on data rather than emotional bias.
However, there are certain limitations to robo advisors. These platforms lack the personal touch and customized financial planning that human advisors can provide. This is why they are unsuitable for people with more complex financial situations. Additionally, robo-advisors may not account for unique circumstances or changes in a client’s life. For instance, a significant life event like marriage, the birth of a child, or a career change, etc., can bring changes to your financial goals. A human advisor might adjust the financial plan accordingly, whereas a robo-advisor platform might not respond as effectively.
Finding an advisor who meets your financial requirements and understands your financial aspirations is vital. With so many different types of financial advisors, narrowing down your search can be tricky. However, you can select the best candidate as long as you have a clear understanding of your personal goals and aspirations. Once you have chosen the most suitable fee type for your needs, it is advised that you check other details such as the financial advisor’s qualifications, experience, niche, certifications, etc. This will ensure you hire someone competent, trustworthy, and aligned with your requirements.
WiserAdvisor’s free financial advisor match service is a great online tool for looking for financial advisors. However, please note that the vetted advisors you will be matched to are fee-only or fee-based advisors. We do not have any advisors that provide commission only as their method of compensation to ensure the advisors work towards your best interest. Answer some simple questions about your financial needs, and our matching tool will connect you with 1-3 advisors who best suit your requirements.