Working with a financial advisor can help you gain a better understanding of your situation and develop a plan for making the most of your money. Financial advisor services are not free, however, and it’s important to consider what fees you might pay for professional advice. Familiarizing yourself with different financial advisor compensation models can be helpful when searching for an advisor to work with.
Why Do Financial Advisors Charge Fees?
Financial advisors provide expert advice to their clients on a range of topics, including budgeting, saving and investing. While some advisors may specialize in a particular area of money management, they generally serve the same purpose in helping people to reach their financial goals. In exchange for those services, financial advisors expect to get compensated for their expertise and advice.
That being said, financial advisors don’t all collect their fees the same way. One advisor may charge higher fees than another, depending on which compensation model they use and the range of services offered.
Some advisors may offer a free initial consultation in which a prospective client can get answers to some of their most pressing financial questions. Should you decide to take advantage of a financial advisor’s services after this conversation their regular fee schedule would apply.
Financial Advisor Compensation Models
Financial advisors can choose to assess fees differently based on how their business is structured, the types of clients they work with and what kind of advice they provide. The most common financial advisor compensation models are:
- Commission-based
- Fee-based
- Fee-only
Here’s a closer look at how each compensation model works.
Commission-Based
Commission-based advisors earn money by recommending and selling specific financial products. For example, a commission-based advisor may collect a 5% commission each time they sell a specific insurance or annuity product to a client.
Advisors who use a commission-based model can also base their fees as a percentage of assets under management (AUM). If your advisor charges a 0.30% commission, they’d earn $300 for every $100,000 in assets under management.
Fee-Only
Fee-only financial advisors only charge fees for the services they offer. They don’t receive compensation or commissions for recommending certain investments or financial products.
A fee-only advisor can structure their fees in different ways. For example, your advisor might charge:
- A flat fee
- An hourly rate
- A fee that’s equivalent to a percentage of assets under management
It’s common, for instance, for fee-only advisors to charge their clients approximately 1% in fees annually using the assets under management model. If your advisor is managing $1 million in assets on your behalf, then you’d pay them $10,000 a year in fees.
Fee-only financial advisors are typically held to a fiduciary standard, which again means that they’re required to act in your best interest when providing advice. Working with a fee-only advisor might be preferable if you’re concerned about potential conflicts of interest with the advice they provide. Should a fee-only advisor do something that you believe is out of bounds, you could seek resource by claiming a breach of fiduciary duty.
Fee-Based
Fee-based financial advisors can charge clients fees equal to a percentage of assets under management, but they can also receive commissions or additional compensation for selling securities, insurance or other financial products. For instance, a fee-based advisor my collect an AUM fee from a client, as well as a sales commission from an insurance company for selling an annuity to the same client.
This compensation model is a conflict of interest, because the advisor has a financial incentive to recommend certain products and services over others that may be more affordable or appropriate for your situation. However, even when they are acting on behalf of a broker-dealer, fee-based financial advisors are still obligated to act in your best interest, thanks to an SEC rule called Regulation Best Interest.
How Much Should You Pay in Fees to a Financial Advisor?
Generally speaking, fee-only advisors charge around 1% of assets under management for their services. The fee may go down as you increase the amount of assets they’re managing for you.
For example, a study from AdvisoryHQ found that the average AUM fee charged by financial advisors ranges from 1.18% to 0.59%. The average client with $1 million in AUM pays a rate of 1.02%, the same study found.
But is it worth paying a financial advisor 1%? It could be if you’re interested in benefitting from their professional knowledge and expertise. A financial advisor can offer advice to help you make decisions regarding:
- Investing and retirement planning
- Budgeting and debt repayment
- Saving for college
- Insurance planning
Paying a financial advisor’s fees could be a worthwhile investment if you’re unsure how to create your personal financial plan. And being able to talk to a human advisor during times of uncertainty can be reassuring. For example, an advisor may be able to talk you down from panic selling when stock prices to start to dip.
Of course, if you’d rather not pay an advisor’s fees you might consider a robo-advisor instead. Robo-advisors use an algorithm to design a portfolio for you. You contribute money and the robo-advisor handles the investing part for you. Some robo-advisors also offer additional services such as automatic rebalancing or tax-loss harvesting. Compared to the 1% fee a financial advisor might charge, a robo-advisor’s fee may be just 0.25% or 0.35%.
The drawback is that robo-advisors don’t offer the human touch that financial advisors do. If you value a personal touch, then you may be better off finding a financial advisor to work with.
How to Choose a Financial Advisor
If you’re interested in working with a financial advisor, it’s important to do some research beforehand. Knowing what questions to ask can help you vet potential candidates and find the right advisor for you.
Here are some good questions to ask a financial advisor:
- What range of services do you offer?
- Who is your typical client?
- What’s your investment style?
- How do you structure your fees?
- What do you charge for your services?
- How often will we communicate?
- What’s your preferred method of communication?
- Do you work alone or with a team?
You can also use the FINRA Broker Check tool to research an advisor’s background, including their credentials, licensing and any disciplinary or ethical complaints filed against them.
Bottom Line
Comparing financial advisor compensation models is a key step in finding an advisor to work with. If you’re specifically interested in a fiduciary, for instance, then you’d want to look for a fee-only advisor. When researching advisors, remember that transparency is key. If an advisor seems reluctant or unwilling to disclose fee information, that’s a good indicator that you may want to look elsewhere.
Financial Planning Tips
- Finding a financial advisor doesn’t have to be hard. 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.
- If you’re interested in a robo-advisor, be sure to compare the different options to see which one might work best. For instance, you may want to look at the range of investments offered and how portfolios are structured. Fees are another important consideration, and you may want to choose an advisor that reduces the fee as your assets under management increase. Reading robo-advisor reviews can help you narrow down the list of companies that you might want to invest with.
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