95% of those who pay a financial advisor think it’s worth the money – and it costs them a lot less than they expected. Many – maybe even you – think that they are too costly, only for the wealthy and/or the middle-aged. But the average annual cost for a financial fiduciary is less than what most families spend on cable or their cell phone bills in a year – with usually much higher dividends.
A financial advisor offers valuable advice, expertise and guidance to help you achieve your financial goals and save for a comfortable retirement. But the top barrier preventing Americans from seeking financial advice from a financial advisor is the fear they don't have enough money to hire one, according to research from Intellifo.
You might be surprised to learn many financial advisors offer services at a very reasonable price.
Over the years, financial advisor fees have trended lower as the industry has moved to a more transparent pricing structure. But there remains a lot of confusion about how financial advisors make money and how much is reasonable to pay.
Before discussing costs, let's review what an advisor can do for you and why hiring one can be a worthwhile investment.
What Do Financial Advisors Do?
Though many people use a financial planner simply to invest for retirement, this is only a small part of what many advisors offer. They also help you budget for college, manage debt and offer planning services for insurance, inheritance, taxes, and more.
Financial advisors can help with your entire financial picture. As you start to plan for life's bigger milestones, you should consider finding an advisor who specializes in the areas most important to you.
By working with an advisor, you're more likely to minimize risk, maximize gains and take advantage of tax breaks while investing for your future. Advisors can also help you protect your assets with the right kinds of insurance and help you pass on your financial legacy with a proper estate plan.
How Much Does a Financial Advisor Cost?
The cost of hiring a financial advisor can vary significantly based on the services provided.
There are at least seven ways financial advisors are compensated by clients, each with varying costs.
The “assets under management “or “AUM” fee model is the most common way traditional financial advisors charge for their service. The current industry standard is to charge anywhere from 0.50% – 2% of the assets being managed on an annual basis.
The AUM model is a generally accepted industry standard, with advisors often referred to as “fee-only” financial advisors because they don't accept commissions for investment products. Instead, these advisors are compensated for investing your money based on your risk tolerance, goals, timelines, and other factors of your financial plan. This is generally best for people who want a full-service advisor.
A newer fee structure, the “percentage of income” model, charges a fee based on your current income rather than total assets. This model is often best for those who may have a decent income but are at the beginning of their financial journey and don't meet the minimum account balance threshold for many traditional financial advisory firms (typically, $100,000 – $500,000).
Other financial advisors charge a flat fee. This fee structure is usually simpler, but it's important to look under the hood to understand what services are offered and how the fee is calculated.
For example, a flat fee charged by some financial advisors may include developing a financial plan for you but not investing your money on your behalf. Other flat-fee financial advisors might include investment advisory services.
Flat-fee financial advisors will typically outline exactly what their planning service includes. Yet just because a financial advisor charges a flat fee doesn't mean every client will pay the same rate. In many instances, the flat fee might be calculated based on your income, portfolio size, and/or the overall complexity of your individual circumstances. The flat-fee structure is best for people who desire a longer-term relationship with a financial advisor but want to keep costs consistent.
“While no fee model is perfect, the flat fee model is one of the most transparent and fair advisor-client compensation methods,” said TJ van Gerven, Certified Financial Planner and founder of Modern Wealth Builders. “With a flat fee model, you always know what you're paying for, and you can work with an advisor regardless of your assets.”
A growing number of financial advisors charge hourly (ranging from $150 to $400+ per hour). These prices do not change based on your total assets managed, so you only pay for the time you need with the advisor. Hourly financial advice is best for those who want access to a financial advisor to answer questions and help you build a financial plan but may not be ready for a long-term commitment.
“Hourly advice tends to make sense for someone who can self-implement recommendations and who is hands-on when it comes to their personal finances,” said Ryan Firth, founder of Mercer Street Company. “For example, if you're looking for a second opinion on your investment portfolio or just need one-off financial advice, then an hourly fee might be just what you're looking for.”
Many advisors offer subscription-like services, charging a monthly or annual fee ranging from $50 to $500 per month (or more), depending on the level of support needed. Typical “packages” offer a limited amount of annual meetings, reviews, and 1:1 time with your advisor.
When working with a subscription-based advisor, the more you pay, the more guidance you're likely to receive. This subscription model is best for those who don't have a large balance of investable assets but still want access to a financial advisor.
Then there are financial advisors who receive commissions from selling you certain financial products (e.g., mutual funds and insurance products). There has been pushback against this model in recent years, as many clients get sold products they don't necessarily need.
Choosing a Financial Advisor
Before hiring an advisor, determine what services you need from them. Then, whether it's full-service investment management or a plan focused on a specific area, put together a list of what you'd like help with.
You may want a financial advisor who serves clients with particular needs or interests. For example, many XY Planning Network financial advisors are dedicated to a specific niche (e.g., business owners, attorneys, and more).
Once you know what services you desire, review the fee structures offered by advisors and consider the factors discussed above. Finding a balance between the services you need and the cost will help narrow down the field of advisors you may want to work with.
Then it's time to contact a few advisors and interview them. Ask them about their services, fee structure, investment strategy, performance metrics, and communication channels.
Interview multiple advisors to get a feel for who you want to work with. A combination of fees, services, and customer service will help you determine the best fit for your financial advice. And remember, you don't need to consider working only with local financial advisors. Many advisors work with clients nationwide as virtual advisors, using Zoom calls, email, and chat to stay in touch about your plan.
Once you find an advisor (or two) you feel comfortable with, check their credentials. You can do this at the Investment Adviser Public Disclosure (IAPD) website. Since financial advisors operate in a highly regulated industry, often acting as fiduciaries, there is oversight into how financial advisors conduct business, so running a quick check on them is recommended.
More Articles From the Wealth of Geeks Network:
- What is a Certified Financial Planner?
- Do Edward Jones Financial Advisors Always Act in Your Best Interest?
Jacob Wade is the budgeting expert who started iHeartBudgets, a place where Millennials and young families come to learn EXACTLY how to build a budget that WORKS.
Jacob quit his job in 2018, sold his house and 95% of everything they owned to take off on an adventure of a lifetime and RV around the USA.
He is now on a mission to spread the message of Financial Freedom around the country, and help others build a “Freedom Plan” of their own!