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Is It Worth Paying a Financial Advisor

A financial advisor can give valuable insight into what you should be doing with your money to reach your financial goals. But they don’t offer their advice for free. The typical advisor charges clients 1% of the assets that they manage. However, rates typically decrease the more money you invest with them. So you might be wondering whether it’s worth paying a financial advisor, but that answer is very personal to you. If you want help finding a financial advisor, try using SmartAsset’s free matching tool.

What Financial Advisors Do

Generally speaking, financial advisors help you to manage your money. They work with you in creating a financial plan designed for your unique goals. For example, that might include saving $1 million for retirement. Also, it could involve building a college savings fund so your children can graduate without student loan debt.

What a specific advisor does can vary. It depends on whether they specialize in a particular area of money management or hold any financial certifications. For instance, a Certified Financial Planner typically offers comprehensive financial advice to their clients. And because these advisors take a broad look at your financial situation, they could help you with things like creating a debt payoff plan and building emergency savings. In the long term, they can also ensure that you have enough life insurance coverage and know what investments belong in your retirement strategy.

A financial advisor who holds a Chartered Financial Analyst designation, on the other hand, may focus on investment advice. They could help with picking stocks or mutual funds. Also, they might assist with strategic portfolio moves or stock market analysis.

Which financial advisor you work with largely hinges on what you need them to do. Your choice can also determine whether you pay 1% for financial advisor, more than that or less.

How Financial Advisors Make Money

Financial advisors don’t all offer the same type of financial advice. They don’t all use the same fee schedule either. Depending on the advisor, their fees may be structured in one of these six common ways:

  • Hourly rate.
  • Flat fee.
  • Quarterly or annual retainer fee.
  • As a percentage of the assets they manage.
  • Commissions only.
  • Combination of commissions and fees.

Fee-only advisors charge based on the services they offer. So they might charge you by the hour or as a percentage of your assets. They also may use a retainer fee on a flat fee basis for individual services.

A fee-based advisor makes money by charging a combination of fees and earning commissions on investment products. So you might pay your advisor $100 per hour. But you may also pay them a 5% commission fee each time you purchase an investment they recommend. This commission often deducts directly from the amount you invest.

Keep in mind that these fees apply to human financial advisors. If you’re using a robo-advisor, the fees work differently.

Is It Worth It to Pay a Financial Advisor?

Is It Worth Paying a Financial Advisor

If you’re already working with an advisor, the simplest way to determine whether a 1% fee is reasonable may be to look at what they’ve helped you accomplish. For example, if they’ve consistently helped you to earn a 12% return in your portfolio for five years running, then 1% may be a bargain. The same could be true if they’ve helped you to finally pay off a large amount of debt or reach a major money goal.

This can be a trickier benchmark to use if you’re not working with an advisor yet. In that case, perhaps check the advisor’s track record and reputation and answer “is it worth paying a financial advisor?” An advisor with rave reviews from current or past clients has a mark in their favor. They’re earning their keep, fee-wise.

If you don’t have an advisor yet and you’re concerned about fees, it’s important to understand your goals. If you have very basic financial management needs, then consider an advisor that charges lower fees or only charges by the hour. However, you may want to choose a robo-advisor to start, then move to a traditional financial advisor as your needs change.

What Do Robo-Advisors Cost?

Robo-advisors offer financial advice that’s based on an algorithm. Some offer human financial advisor support. However, most of the time a computer program essentially manages your investments. Since there’s less hands-on human involvement, robo-advisors tend to charge fewer fees than traditional financial advisors. For example, instead of paying 1% in fees annually, you might pay 0.25% or 0.5%. However, it depends on the amount of assets you have under management. Some robo-advisors can charge fees that are lower or higher, but 0.25%-0.5% is a typical fee range.

If you’re asking “is it worth paying a financial advisor 1%,” robo-advisors may seem like an attractive cost-saving alternative. But ask yourself what level of service and advice do you expect for your money.

If you’re comfortable with a hands-off investment experience where an algorithm drives decisions, then a robo-advisor could be a less expensive option. You may also lean toward a robo-advisor if you’re new to investing. Some platforms charge no management or advisory fees for investors whose assets fall below a certain threshold.

On the other hand, you may prefer to have someone who can answer your questions. Also you might make adjustments to your portfolio based on life changes or seek advice on specific investments. A human advisor can deliver that. Only you can decide whether an advisor’s help and advice justifies the fees you’re paying.

Bottom Line

Is It Worth Paying a Financial Advisor

When weighing an advisor’s fee, consider your desired return on investment. Ask an advisor if they’re fee-based or fee-only. Question any advisor who doesn’t share information about fees. Review the fees you’re paying annually and compare them to the services you’re receiving. That can indicate if your advisor is still a good fit. It can also help to compare the fees of your advisor with others who offer similar services.

Financial Advisor Tips

  • Investing isn’t the only area a financial advisor can help you with. There’s a range of financial matters that can benefit from expert advice, including budgeting, insurance, home buying, mortgage refinancing and estate planning. Finding a qualified 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.
  • Aside from researching the fees an advisor charges, be sure to research their background as well. That includes their professional credentials, licensing and experience as well as any regulatory actions or complaints that have been filed against them. FINRA’s free broker-check tool can help you with vetting prospective advisors.

Photo credit: ©iStock.com/AndreyPopov, ©iStock.com/VioletaStoimenova, ©iStock.com/Goodboy Picture Company

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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