Financial advisors charge fees for their services. Depending on how the advisor gets paid, you may pay fees directly to them or indirectly through the investments they offer. Flat-fee financial advisors earn a flat fee for services instead of getting a commission or a percent of assets under management (AUM). Let’s break down how much it costs. Consider working with a financial advisor to help you reach your saving and investing goals.
4 Types of Fees That Financial Advisors Charge
There are four primary ways that financial advisors charge for their services. Each of these fee structures is right for certain types of investors, depending on the size of their portfolio, the services they need and what they’re investing in.
Flat fee. A flat-fee financial advisor charges a flat fee or hourly rate for their services. The complexity of your portfolio or their level of expertise tends to determine their fees more than the size of your investment portfolio. A flat-fee financial advisor’s fees are not contingent upon you buying specific investments. Because of this, they are generally freer to recommend a wider variety of investments. Also, they are often willing to work with clients of all portfolio sizes.
Percentage of assets. Advisors who charge a percentage of assets under management (AUM) charge fees based on the size of your portfolio. As your portfolio shrinks or grows, so do their fees. While this can make sense in some situations, investors with larger portfolios may feel that the amount charged is not in line with the services provided. Additionally, these advisors may have minimum portfolio size requirements to receive their services.
Performance-based fees. Advisors that charge based on performance often earn a percentage of the profits earned on your portfolio. Depending on your agreement, they may earn a percentage of any profit or only if they outperform a predetermined benchmark. This fee structure is common in hedge funds and incentivizes advisors to outperform the market. However, the downside is that they may take on additional risks in order to earn bigger incentives.
Commissions. Commissioned advisors only get paid when you buy or sell specific investments, such as a loaded mutual fund or annuity. Because of this, investors may feel that those advisors are steering them to more lucrative investments instead of what is best suited for the investor. These advisors are paid directly from the investment companies rather than you. The commissions are listed in disclosures and prospectuses, but the average investor may not pay attention to this “hidden” fee structure. Beginning investors often start out with this arrangement because the fees are relatively minimal based on a small portfolio size.
How Much Do Flat-Fee Financial Advisors Cost?
The rates for a flat-fee financial advisor varies based on the services you require. Their experience, location and other factors also contribute to their rates. For example, a flat-fee financial advisor may charge a one-time fee of $1,500 to $2,500 for the creation of a full financial plan.
Beyond the initial financial plan, flat-fee financial advisors often charge rates between $100 and $400 per hour for ongoing services. These can be annual reviews of your portfolio or to answer questions when you have major financial changes. Major changes may include a new job, getting married, having a baby, buying a home, receiving an inheritance or the loss of a spouse.
A flat-fee advisor’s rates are clearly defined. However, you may still pay additional investing expenses based on the investments that you choose. These extra costs can include trading costs, mutual fund management fees and insurance product expenses.
There are several common ways that clients pay for financial advice. Each has its own unique pros and cons. Working with a flat-fee financial advisor provides the most transparent and controllable costs of any advisor arrangement. You only pay for services when you need them. Plus, their fees aren’t tied to the size of your portfolio or based on buying specific investments. For larger investors, working with a flat-fee financial advisor can provide valuable expertise at an appropriate price point.
Tips for Working With a Financial Advisor
- Being diversified within your portfolio is one of the keys to investing success. When you work with a financial advisor, they’ll help you develop an asset allocation strategy to meet your goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one 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 not ready to work with an advisor yet, our asset allocation calculator can help you create an asset allocation strategy to match your risk tolerance and timeframe. The calculator shows how much you should have in stocks, bonds and cash based on your investor profile.
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