Financial Advisor Fees and Costs: What You Need to Know
Working with a financial advisor can be an excellent way to achieve your financial goals, no matter your income level. However, many people are hesitant to seek out this kind of professional help because of uncertainty over advisory fees and the false perception that financial advisors are only for the wealthy. In this guide, we’ll explore financial advisor fees and costs.
What is a Financial Advisor?
A financial advisor is a professional who offers specialized services that can help clients manage their finances better. The range of services they offer includes investment advice and strategy, comprehensive financial planning, and management of investment portfolios. Financial advisors can also help clients prioritize their financial objectives and adjust their finances after a major life transition, such as a divorce or retirement.
How Much Does a Financial Advisor Cost?
Several factors play a role in determining the cost of working with a financial advisor. One of the most significant factors is whether you choose a human advisor or a robo-advisor.
Human advisors are financial advisors who you can directly work with. They generally work under one of three payment structures: fee-only, fee-based, and commission-based.
Fee-only advisors make money by charging a flat fee, such as an hourly rate or an assets under management (AUM) fee. They do not make money from commissions. Their services usually range between $2,000 to $7,500 annually as a retainer. In exchange, you get comprehensive investment management and asset planning. Hourly fees of financial advisors cost between $200 and $400 for every hour, and in this fee structure, you only pay for the time spent with your advisor. Financial planners who charge AUM fees levy around 1% of the assets that they manage. Higher asset values warrant higher AUM fees. Expect a financial advisor to charge $5,000 annually for managing $500,000 assets.
Some fee-only advisors may not accept clients with balances under a set amount, such as $250,000.
Like fee-only advisors, fee-based advisors charge clients AUM, hourly, or flat fees for their services, but they also get paid via commissions for financial products they recommend. Fee-based advisors vary in costs, neither more expensive nor cheaper than fee-only advisors because costs differ.
Commission-based advisors are financial advisors who earn a commission from their clients based on the financial products they recommend. These advisors earn their money exclusively from commissions that they receive from recommending specific assets. The charges differ for various investment types, and if an advisor recommends mutual funds, expect the commission to lie between 3% and 6% of the value of the investment. Due to their payment structure, some people are skeptical about potential conflicts of interest.
Robo-advisors are automated digital tools that offer financial advice or manage finances with little human intervention. They depend on algorithms, software and data to provide insights and help clients achieve financial goals. Robo-advisors are the most affordable alternative for investment management, and their fees can range between 0.25% and 0.50% of the assets the advisor manages for you.
- Financial advisors help you make better financial decisions and manage your finances better
- Human advisors have multiple payment structures, including fee-only, fee-based, and commission-based
- Commission-based advisors earn commissions on financial products they recommend; fee-based advisors charge AUM, hourly, or flat fees and commissions
- Robo-advisors use algorithms and software to help clients achieve their investment goals
Working with a financial advisor doesn’t depend solely on your income level. The cost of advisory services can vary significantly depending on whether you choose a human advisor or a robo-advisor and under which payment structure. Consider all aspects, including expenses and fees, before choosing a financial adviser that is right for you.
Choosing the right financial advisor is critical to achieving long-term financial goals. Understanding various payment structures and fees can help you determine which type of financial advisor will work best for you. Financial advisors can help take your financial goals to the next level and offer significant value in return.