How much should you pay a financial advisor?
The answer is, there are a lot of answers to this question. The simple one is: around 1%. That’s the average rate that a professional financial advisor charges to manage your money. The better one is: it depends entirely on what services you need and how much money you have. A financial advisor should charge you more for a more comprehensive service plan, and they will typically charge less to manage greater wealth.
For example, say that you have $2.5 million invested with your financial advisor (known as “Assets Under Management” or AUM). A 1% fee would be around average, although you can probably get a better price for this kind of money. The more important question, though, is whether you’re getting the right services for your money.
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How Do Financial Advisors Charge?
The first thing to remember is that financial advisors can charge a variety of fee structures based on their underlying services. The most common options are:
- Percentage: A flat percent of the total assets under management, typically charged annually. This is typically charged for managing an investment portfolio.
- Hourly: A fixed hourly rate billed for all services, typically rounded up to the nearest six minutes. This is typically charged for open-ended but specific services, like financial consulting.
- Fixed-Fee: A specific fee charged for individual financial services. This is typically charged for limited, closed-ended services like filing taxes.
- Commission: A fee charged for conducting individual financial transactions like purchasing an asset or making a trade. This is increasingly uncommon.
- Performance-Based: A fee or percentage charged for meeting specific financial benchmarks. This is typically charged when managing an investment portfolio, and is also relatively uncommon.
It’s not uncommon for advisors to have a varied fee schedule based on the services that you select at any given time. For example, an advisor might charge a percentage to manage your investment portfolio while also charging a fixed-fee to file your taxes and an hourly rate for financial advice. This is known as fee-based services.
Many other advisors will package all services into a single overall percentage fee. In this case, you receive a range of services included in your AUM percentage fee. This is known as fee-only services. It is very important to understand whether your advisor charges on a fee-based or fee-only model, otherwise you can wind up with surprise charges.
In all cases, be cautious of advisors that charge commissions or that charge little (if any) costs to you. These are not necessarily indicia that the advisor is untrustworthy, but both can be a sign that your advisor receives payments from a third party. For example, an advisor might receive commissions from a mutual fund for each client placed in that fund. This is not illegal or suspicious per se, but does create a conflict of interest worth addressing. Make sure to discuss whether your advisor receives payments from any third parties, and be very careful about investing with an advisor that does not have a fiduciary duty to you. Consider matching with a vetted fiduciary financial advisor if you’re interested in professional guidance or a change of advisors.
For an investor with $2.5 million under management, this is the first step: What services are you getting? Given the amount of wealth here, it would be fairly common for your advisor to provide whole-picture (fee-only) financial services. If you are paying 1% on that kind of portfolio, you should probably be getting financial planning, tax advice, estate advice and other services beyond just portfolio management.
What Is the Average Fee?
So, when it comes to portfolio management, what’s the average fee?
Information on this subject is relatively limited, in large part because professionals in this field tend to guard their and their clients’ privacy. However, a handful of firms such as Advisory HQ, Comply, and Harness have looked at the issue. These studies consistently report two findings:
- First, the standard range for advisory fees is between 0.5% and 2.0%
- Second, the average advisory fee is approximately 1.0% (specifically ranging from 0.95% to 1.02%)
When it comes to flat rates and hourly fees, the range is similarly broad. A typical hourly fee ranges from around $120 to $300 per hour depending on the nature of the services performed. Clients should expect to pay higher prices for more complicated work and more experienced advisors.
A standard flat fee will range from around $1,000 to $3,000 for most standard services. For example, this is around what the ordinary household should expect to pay for tax preparation or making an overall financial plan. For more comprehensive services or high-net-worth households, standard fees will range from around $7,500 to $55,000. For example, a household with around $5 million to invest, looking for an overall financial and investment plan should expect to pay around $40,000 for a flat-fee financial planner.
Watch for Combined Fees
It’s important to remember that these are only the fees charged by your financial advisor. This does not necessarily reflect your total costs of investment, because you might also pay fees charged by third parties.
This is most common if you invest in funds or other portfolio-based assets. For example, here your financial advisor charges 1% per year to manage your portfolio. Say that you also hold a mutual fund that charges a 0.8% annual management fee. That segment of your portfolio would cost 1.8% per year in combined fees.
The same is true, as noted above, when you work with a fee-based financial advisor. In this case, your advisor might include transaction fees or other costs on top of the annual management fee. Make sure to understand the true total cost of your investments, not just the face-value annual charges, and discuss this with your advisor.
What Do You Get for Your Money?
Here, you have $2.5 million under management. At time of writing, this means that you’ll pay about $25,000 in management fees just this year alone. What should you expect for that money?
For starters, you should expect a modest discount. On average, clients with that kind of portfolio tend to pay closer to 0.9% in annual fees. This isn’t a big difference, but it could save you $2,500 per year which isn’t nothing.
Beyond that, look at two issues: services and returns.
You have a lot of money here, so you really will want a decent range of financial services to make the most of your wealth. A good financial advisor can help you across many domains, including tax planning and preparation, long-term wealth management, retirement planning, and an overall financial strategy to help you grow and preserve this wealth.
You also want someone who can help grow your portfolio and invest your money. Basically, what kind of returns are they helping you get? And how do those returns meet your current financial needs?
Investment growth is not the only financial issue for most people. You might have other goals, such as security or long-term targets, in which case your financial advisor might provide benefits beyond the volatility of a market-exposed portfolio. SmartAsset’s proprietary valuation model suggests that there are a plethora of ways advisors add value to their client’s bottom line, and that the benefit may average 2.39% to 2.78% annually for people with advisors — even after accounting for fees.
You’re currently paying 1% per year to manage a $2.5 million portfolio. That’s slightly high, but around average. You may be able to negotiate a lower fee with your advisor. However, the real question here is what you’re getting for your money. When it comes to financial services, you can spend much less than this and get the kind of planning and preparation that you need. If you’re happy with your investment and portfolio plan, then this looks about right. If not, then consider shopping around with SmartAsset’s free tool that matches people to vetted fiduciary financial advisors.
The Bottom Line
If you have a financial advisor, around 1% per year is around the average fee for assets under management. However, make sure that you’re actually getting value for your money. Look at the plan, returns, security and services that your financial advisor provides because 1% is average, but the important question is whether it’s right for you. You can also negotiate your rate or search for a different advisor.
More Tips
- Picking the right financial advisor is like picking a doctor. This isn’t just about whether someone is open and accepting new clients, you need to connect, like and trust each other. So here are 7 tips for making sure you build a relationship with the right person.
- Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
- Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.
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