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Like many people, you may be considering a financial advisor to help you navigate the complex world of personal and household finance. Indeed, a financial advisor can be a valuable resource for developing a financial plan, managing investments, planning for retirement, and achieving your long-term financial goals. But before you take the plunge, it’s essential to understand the costs involved and weigh the benefits against the potential fees.
In this article, we will explore the average cost of financial advisors, comparing traditional advisors with newer technology-driven alternatives like the roboadvisors. We’ll discuss the different types of fees involved and offer tips on how to reduce costs and find the right advisor for you. By carefully considering the various fee structures, comparing advisors, and ensuring you receive fair value for the services provided, you can make a smart decision about your money and how it will be managed.
Key Takeaways
- Financial advisors are helpful for crafting a financial plan and managing aspects of your finances.
- However, financial advisors also come at a cost.
- Financial advisors’ fees vary based on the fee structure (AUM-based, commission-based, or fee-only) and services provided.
- Roboadvisors offer a lower-cost alternative to traditional financial advisors, but are less hands-on and more generic.
- Finding the right financial advisor involves more than just evaluating costs, such as: seeking referrals, checking credentials, researching reviews, and ensuring alignment with your financial goals.
The Average Cost of a Financial Advisor
Financial advisors today typically get paid in one of three ways (or some combination of them): a percentage based on the amount of assets under management (AUM); commissions based on particular products or services; or a flat-fee (known as fee-only).
The average cost of a financial advisor depends on the fee structure, the services offered, the client’s needs, and the location they serve.
Fee-Only
Fee-only advisors charge a fixed rate for their services, typically ranging anywhere from $1,000 to $7,500 or more per year (depending on the level of service and the client’s needs), or an hourly fee ranging from $100 to $400 per hour.
For example, a standard consultation may focus on budgets and cash flow, savings ability, investment portfolios, and insurance coverages. This might take 6-10 hours (so maybe around $1,500-$2,500). A more detailed examination of your financial picture, including retirement planning, education funding, tax advice, purchasing a second home, etc. will often take longer (such as 14-20 hours) and could cost around $3,500-$5,000, or more depending upon the complexity.
Some may also charge a one-time fee for an initial consultation and the creation of comprehensive financial plan, ranging from around $1,000 to $3,000.
Fee-based advising has seen increased popularity over the past several years, and its growth reflects a preference for fee transparency and greater objectivity from advisors who do not need to worry about different commissions or sales structures.
NAPFA requires that their members use the fee-only method of compensation which they say is the most transparent and objective method available.
AUM-Based
The traditional fee structure for financial advisors has been based on assets managed. AUM-based advisors charge for their services based on a percentage of assets under management, which typically range from 0.5% to 2% of your total assets.
AUM fees have been trending downward over the past decade due to increased competition among advisors and from lower-cost fintech options. Today, the typical fee is around 1%. This means that if you have $1,000,000 invested with a traditional advisor who charges 1% AUM, you will pay $10,000 per year in fees.
Some traditional advisors may also charge additional fees for financial planning, trading commissions, account maintenance, or product sales.
Commission-Based
Commission-based advisors earn a percentage of the sales or transactions they execute for clients. For example there may be a per-trade commission for buying stocks, bonds, or loads for mutual funds; as well as a percentage-based commission on insurance products and annuities. The size of the commission will depend on the size or frequency of the transaction or investment and can vary among the different financial services companies offering these products.
This compensation structure can thus create potential conflicts of interest, as commissioned advisors may be incentivized to recommend those products that generate higher commissions, even if there are lower-cost options that are more suitable.
Are Financial Advisors Worth the Cost?
Cons
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Comes with fees
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Potential for conflicts of interest
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Often requires minimum asset levels
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Limited value for DIY investors
The Cost of a Traditional Advisor vs. Roboadvisor
Roboadvisors are a relatively new class of financial advising that relies on algorithms and other technologies to automate financial planning and portfolio management — generally at very low cost and with low minimums required to open an account (sometimes with no account minimums at all).
Traditional financial advisors offer personalized advice and tailored financial plans, which often come at a higher cost and also can require minimum opening balances of five or six figures, or more.
Fees for roboadvisors usually range from 0.25% to 0.50% of AUM, making them an affordable alternative for investors with lower account balances. Most roboadvisors also automate passive indexing strategies that often optimize portfolios based on Modern Portfolio Theory (MPT), making them suitable for most long-term investors.
However, roboadvisors may, at the same time, lack the personalization and sophistication required of some clients and can also have other costs associated with their services, such as fund expenses or withdrawal fees. Roboadvisors may also not be best-suited for do-it-yourself investors and more active traders who want to play a more direct role in picking which assets belong in their portfolio, since the roboadvisors’ algorithms take care of all of that without client input.
Tips for Finding a Financial Advisor
If you’re in the market for a financial advisor, you may want consider the following:
- Seek referrals from friends/family
- Check their credentials and certifications
- Research online reviews
- Schedule free consultation meetings
- Evaluate their fees and costs
- Ensure alignment with your goals
How to Reduce the Cost of a Financial Advisor
- Compare fees and services: Shop around and compare fees and services offered by different advisors to find the best value. Not every financial advisor has the same cost structure, so it’s worth comparing. Moreover, try to avoid paying for additional services that you do not need or want.
- Negotiate fees: Don’t be afraid to negotiate fees with potential advisors. Some may be willing to lower their rates to secure your business or to take you away from a competitor.
- Consider roboadvisors: If you have a smaller account balance, consider using a roboadvisor for a lower-cost, set-it-and-forget-it alternative.
- Learn how to do it yourself: For those who are willing to put in the time and effort, learning to manage your own finances can be a cost-effective alternative to hiring a financial advisor. There are numerous resources available, such as books, online courses, and forums, that can help you build your financial knowledge and develop your investment strategy. However, be prepared to dedicate time and effort to stay up-to-date and manage your financial plan effectively.
You can find out financial advisors’ fee schedule by asking them outright, looking at the advisor’s website, or looking up their Form ADV filed with the SEC (which you can do here).
How much money should you have before using a financial advisor?
There is no definitive answer to how much money you should have before using a financial advisor, as different advisors may have different minimum requirements, fees, and services. Some advisors require a minimum of $50,000 in investible assets, and some may require S100,000, $500,000 or even $1 million or more. Some large financial institutions and banks may offer more basic advisory services with lower minimums.
If you don’t meet the minimum asset thresholds to hire an advisor, you can consider seeking out other resources, such as roboadvisors, online financial planning services, or financial education platforms. These options may offer lower fees, lower or no minimums, and more accessibility than traditional advisors.
What is the difference between a financial planner and a financial advisor?
A financial planner is a type of financial advisor who helps individuals and organizations create a strategy and plan to meet their long-term financial goals. The difference between a financial planner and a financial advisor is not always clear-cut, as these terms are often used interchangeably and may often overlap.
A general distinction is that a “financial advisor” is a broader category that can include many professionals who provide various forms of advice or guidance on financial matters. But a financial advisor may also specialize in a specific area of finance, such as investment management, wealth management, insurance, banking, or accounting.
A financial planner usually will have a specific certification or designation, such as the Certified Financial Planner (CFP). Such credentials require meeting certain educational, examination, and work experience requirements. A financial advisor may or may not have any of these qualifications, depending on their role and services.
Are financial advisor fees tax-deductible?
Advisor fees are generally not tax deductible for individuals, especially after the Tax Cuts and Jobs Act (TCJA) of 2017, which eliminated the deductibility of several items. Before the TCJA, Internal Revenue Code Section 212 did allow many individuals to deduct expenses incurred in the production of income, including fees paid for investment advice. Today, if you pay for advisor fees directly from certain types of accounts, such as traditional individual retirement accounts (IRAs), you can essentially give yourself a tax deduction because you are paying the IRA fees with pre-tax dollars. The fees must be paid directly from the account and not reimbursed by the account owner.
The Bottom Line
Understanding the costs and benefits associated with financial advisors is crucial for making an informed decision about managing your personal finances. This article has explored the various fee structures, compared traditional advisors to roboadvisors, and provided insights on how to reduce costs and find the right advisor for your needs. By comparing advisors, assessing fees and services, and ensuring you receive fair value, you can make a smart decision about whether a financial advisor is the right choice for you. Remember, the key is to weigh the potential fees against the value of expert guidance, personalized service, and specialized resources offered by financial advisors to determine if it’s a worthy investment in your long-term financial success.