You’re probably very capable when it comes to managing your finances. But if you ever want advice on financial planning, investments, or other money-related topics, a financial advisor might be able to help. Whether you just want answers to a few questions or you want a long-term relationship, there might be an advisor out there for you.
Naturally, it only makes sense to pay for something that you’ll get value from. It’s hard to quantify the value of saving time, getting clarity on your finances, and enlisting help from an expert. But still, we all appreciate knowing how much something might cost before we commit to anything.
With that in mind, let’s review some research on how much financial advisors typically charge, and we’ll recap some of the most popular ways advisors charge their clients.
Before getting into amounts, it’s critical to understand exactly how you pay somebody for advice. Some advisors set their own rates, while others get paid commissions that are set by product providers. You can broadly categorize your engagement with an advisor in one of two ways:
- Fee-only financial planners
- Commission-based advisors
There are also “fee-based” advisors, who might charge either fees or commissions (or both). This interview from Sixty and Me explores that topic in more detail, but to keep things simple, we’ll cover fee-only and commissioned advisors here.
A fee-only advisor does not receive any commissions for product sales to clients. Instead, you might pay:
- Hourly charges
- Assets under management (AUM) fees for investment management
- Flat “menu” prices for services
- Fees based on complexity, net worth, or other measures
With a fee-only advisor, you typically know how much you’ll pay in advance, and you generally receive an invoice each time your advisor bills you.
An advisor who receives commissions gets paid when you buy something or invest money. For example, when buying into a mutual fund or purchasing an annuity, the person you work with might get a commission based on the amount you buy.
There are several surveys that study how much fee-only financial planners charge.
While studies are helpful, you ultimately need to check with an advisor to understand exactly how much you might pay. These surveys often show the “median,” which is the middle of all survey results when lined up from smallest to largest. Because of that, you can assume that roughly half of advisors charge more and half charge less – and we can’t know exactly how much more or less.
Fees for a financial plan are roughly $2,500 to $3,000 at the median. Those plans might touch on a variety of topics, including retirement income, taxes, investing strategy, and more.
Experienced financial planners tend to charge roughly $250 per hour. That can vary based on location and other factors.
When you hire a fee-only advisor to manage assets for you, the charge is often 1% of assets under management for the first $1 million (and many people retire with less than $1 million). Above that, pricing is often lower. Advisors might or might or might not include financial planning and other services with that fee.
Compensation models continue to evolve, and advisors can design any type of arrangement that works well for clients and satisfies regulators. For just a few examples, some advisors:
- Charge based on complexity (for example, if you own a business or not, if you’re married or single, etc.);
- Offer one-time advice meetings that cover a handful of items for a flat fee;
- Set an annual fee as a percentage of your net worth or income (1% to 2%, for example);
- Manage investments for a flat-dollar fee instead of a percentage of assets.
If you work with an advisor under a commission payment arrangement, the amount can vary depending on the product and the specific vendor. That said, some common commission schedules are below.
When buying traditional mutual funds with a commission, the standard fee is up to 5.75% of the amount you invest. But as you invest more (or if you make a sizeable investment), that sales charge might be lower.
A portion of the cost goes to your advisor – typically at the time you invest, although there might be ongoing “trail” payments as well. Different mutual funds have different commission structures, so be sure to read a prospectus to understand risks and fees.
A traditional stockbroker might charge 1% to 2% of the amount they buy for you. I don’t see this model much anymore, but some advisors likely work with clients under these arrangements.
Annuities often bake the advisor’s compensation into the product. As a result, you can’t always tell how much you’re paying. The “cost” is often a factor of how attractive the benefit rates, surrender schedule, and other features are. However, immediate lifetime income annuities might pay agents as little as 1%, while investment-oriented annuities could have commissions ranging from 4% to 8% or more.
Many Other Options
This is just an overview of typical commission schedules on traditional products. But it’s critical to ask for disclosures and read them carefully. Whether it’s a mutual fund, REIT, or anything else (there are countless financial products out there), the amount you pay can be all over the board.
You might not need to hire a financial advisor. But if you decide to do so, you’re now better prepared to understand some of the costs.
The most important thing when working with an advisor is to find somebody who is capable and trustworthy. I’ll admit that I’m biased toward fee-only advisors because I am one myself, but there are many good commission-based advisors out there, as well.
That said, a fee-only advisor might have fewer conflicts of interest – you can pay them simply to provide advice, and their income doesn’t depend on you buying a product. On the other hand, commission-based advisors might argue that they ensure you take action and implement things appropriately. That can be true, although some fee-only advisors walk you through implementation, as well.
Be sure to consider multiple factors besides pricing when working with an advisor. For example, you might want to find somebody with experience helping women plan for retirement, or you might need an advisor who focuses on executive compensation packages from your workplace. With the right combination of expertise and acceptable pricing, you might have a satisfying experience.
What do you think? Is it worth paying a financial planner for advice, or do you prefer to handle everything yourself? What tips do you have for anybody who is thinking about working with an advisor?