As you strive to reach your financial goals and prepare for retirement, you may consider turning to a financial advisor. But do know much a financial advisor costs? Generally, financial advisors charge a flat fee of $1,500 to $2,500 for the one-time creation of a full financial plan, or roughly 1% of assets under management for ongoing portfolio management. Of course, fee rates and compensation structures differ from advisor to advisor. That can make it challenging to figure out how much you’re paying and if you’re getting a fair deal when you’re trying to find a financial advisor. Here’s what you need to understand about financial advisor fees before signing a contract.
Understanding Financial Advisor Fee Structures
There are five main ways that registered investment advisors charge for their investment advisory services.
- Percentage of assets under management: a percent of the total assets in your account; this percent may follow a tiered schedule, where the higher your asset level, the lower the percentage
- Hourly charges: a rate charged per hour, typically for a special project or consulting
- Fixed fees: a set amount paid for a service, such as the creation of a financial plan
- Commissions: additional compensation earned when a purchase or a trade is made
- Performance-based fees: an additional fee charged if a defined benchmark is outperformed
Advisors may charge one of these fees or a combination of these fees. Fee-only advisors only earn money from fees paid by their clients. They don’t earn commissions from selling products or trading securities in their clients’ portfolios. Fee-based advisors, on the other hand, earn money both from the fees their clients pay as well as commissions and other forms of third-party compensation.
How Much Do Financial Advisor Fees Typically Cost?
When it comes to financial advisor cost, most firms charge fees based on a percentage of assets under management (AUM) for ongoing portfolio management. According to a 2018 RIA in a Box study, the average financial advisor cost is 0.95% of AUM, which for a $1 million account would amount to roughly $9,500 per year. (Fees are often assessed quarterly, though, so depending on how your investments are faring, your advisory fees may be more or less.) Asset-based fees may decrease as the account amount increases, ensuring that high-net-worth individuals are still paying a fair rate. However, this also means that fees will be higher for those with lower account values. The average AUM fee for a $50,000 account is 1.18%, or $590 a year, according to a 2017 AdvisoryHQ study.
Fixed fees and hourly fees typically apply to financial planning or consulting services, as well as special projects. Fixed fees typically range from $1,000 to $3,000. Hourly fees can be anywhere from $100 to $400 an hour, depending on the advisor and the complexity of the project.
|Average Financial Advisor Fees|
|Fee Type||Typical Cost|
|Percentage of Assets Under Management||1% – 2% per year|
|Fixed Fees||$1,000 – $3,000|
|Hourly Fees||$100 – $400 per hour|
The financial advisor cost might not be all you pay in the scenario if you open an account with a financial advisor. In addition to paying the advisor, you’ll also be responsible for brokerage, custodial and other third-party fees. For instance, if a financial advisor uses mutual funds or exchange-traded funds in your account, you’ll have to pay costs associated with those funds in addition to the fee you pay your advisor.
These costs can add up. The average cost of a mutual fund is 1.25%, though low-cost funds can cost less than 0.50%. According to a NerdWallet analysis, a 1% mutual fund fee can cost a young investor as much as $590,000 over 40 years. When discussing fees with your financial advisor, you should be sure to ask about any additional costs you may incur.
Robo-Advisor Fees vs. Traditional Advisor Fees
If you’re just starting out and have a small balance, you might consider working with a robo-advisor. As a rule of thumb, robo-advisors generally charge lower fees than traditional advisors. While traditional advisors typically charge 1% to 2% of assets under management, robo-advisor fees are as low as 0.25% to 0.89% of AUM.
Of course, you’ll be getting different levels of service from each type of advisor. Though both provide portfolio management, a robo-advisor won’t provide guidance on topics like estate planning and insurance planning. Also, you’ll have limited access to humans with a robo-advisor. Typically, robo-advisors are recommended for people with less complicated situations and less to invest, while traditional advisors are suggested for those with more money and more complex financial situations.
Where to Find Info on Financial Advisor Fee Structures
To figure out the financial advisor costs you may be charged, look at the firm’s Form ADV (SEC-filed paperwork). On this form, a firm must clearly note each fee type that it charges for its investment advisory services. Specifically, in Section 5, the firm must check off each type of fee that it charges clients for its investment advisory services.
In Part II of the Form ADV (also called the firm’s brochure), the firm will provide greater detail. That includes information on whether the firm earns money in any way aside from client fees. The brochure will also include specifics on how the firm calculates fees.
Making Sure Your Financial Advisor Fees Are Fair
Before you agree to work with an advisor, make sure you understand the advisor’s fee structure and what services that fee includes. Some advisors may charge extra for certain services and programs. It shouldn’t be difficult for an advisor to explain how he or she is adding value to your accounts. If an advisor gives a roundabout or elusive answer, steer clear. It’s a red flag if an advisor tells you not to worry about costs. Ditto if he or she implies that his or her services are free.
If an advisor makes money from commissions, be sure to inquire about his or her fiduciary responsibility to put your best interest first. You should know all of their compensation sources, and if there are any other professionals they work with. Some advisors include tax-planning services without an additional cost, but many partner with accounting firms for all tax-related work. That means tax and legal services may incur an additional cost.
How to Minimize Financial Advisor Fees
Generally, investors with less assets under management pay a higher percentage of their assets in fees. Think hard about whether a traditional advisor is right for your situation or if you might be better served by a robo-advisor. Robo-advisors generally have lower fees and lower minimums.
If you decide a traditional advisor is right for you, there are two typical fee structures: fee-only and fee-based. Fee-only advisors’ fee structures tend to be simpler and hold less potential for possible conflicts of interest. As you’re shopping around for an advisor, ask pointed questions about advisors’ fee structures, as well as all-in costs. Don’t hesitate to negotiate for a better fee rate.
Tips for Finding a Financial Advisor
- Wondering if an advisor is worth the cost? People who work with financial advisors report greater financial security, and research suggests that working with an advisor can result in additional annual investment returns ranging from 1.5% to 4%. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors, get started now.
- Consider a few advisors before settling on one. It’s important to make sure you find someone you trust to manage your money. As your consider your options, these are the questions you should ask an advisor to ensure you make the right choice.
- If you’re worried about the financial advisor costs, consider using a robo-advisor. Robo-advisors typically require lower minimum investments and charge lower fees. This makes them a better option for people with less money to invest.
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