A recent study out of Lending Tree has some good news and bad news for individual investors.
The good news is that a healthy number of Americans either have or want a financial advisor. About 41% of people who hold investments use some form of professional financial advice, while another 16% report that they would like to do so. This is good, although admittedly with plenty of room for improvement.
Then there’s the bad news in Lending Tree’s research. They find that only 16% of Americans actually understand the fees that a financial advisor charges.
This is a massive gap, especially considering that cost is the number one reason people don’t hire a financial advisor. So let’s take a look at exactly what a financial advisor charges, what you might expect to pay, and what you get for that money.
For more information on financial advisor fees, consider matching with a financial advisor directly and ask him or her directly about fee structure.
What Do Financial Advisors Charge?
Financial advisors charge their clients based on two models: fee-only and fee-based.
Fee-only advisors accept payments only from their clients. They typically make most of their money by charging a percentage of what’s known as assets under management. Sometimes, asset-based fees are calculated according to a graduated table of rates. You might pay 1% for all assets up to a particular threshold like $2 million in AUM, 0.75% for the next $3 million and 0.65% on all assets above that amount.
So, for example, say you deposit $10,000 with a financial advisor who charges 1% annually. They will charge you $100 from this portfolio (the value of 1% of $10,000) and in exchange they manage and invest this money for you.
In addition, a financial advisor might charge you flat fees or hourly rates based on specific services. These financial planning charges generally come in the form of hourly rates, fixed fees for a specific project, and performance fees if the advisor hits metrics.
So, for example, you might pay an hourly fee if you schedule a visit with your advisor to discuss college and retirement planning. This would be in addition to the percentage fee that they charge for managing your portfolio.
Fee-based financial advisors use the same rates as fee-only advisors, charging percentages, hourly rates and fixed rates based on the individual advisor. However they can also accept payments from outside sources, often in the form of third-party commissions. For example, a fee-based advisor might take a commission from the brokerage they use to execute trades or a mutual fund might give them a commission in exchange for selling you shares of that fund.
What Will You Pay?
If that’s how financial advisors structure their fees, the next question is how much you specifically can expect to pay. According to Lending Tree’s research, almost half of everyone who doesn’t have a financial advisor cites cost as the reason why. So, what is that cost in fact?
So what is the cost of a financial advisor? Percentage fees account for much, if not most, of the industry’s charges. According to Advisory HQ News Corp, the average financial advisor fee in 2021 was 1.02% for $1 million AUM, which adds up to $10,200 annually. That percentage rises for smaller accounts. The average AUM fee for a $50,000 account is 1.18%, or $590 a year, according to Advisory HQ .
The second piece of those findings matter to most retail investors. For the typical household, you can expect to pay around 1.18% of your portfolio’s value to your financial advisor each year. These payments are generally broken up quarterly, meaning that you pay about 0.29% of your portfolio’s total value every three months.
Fixed fees and hourly fees typically apply to financial planning or consulting services, as well as special projects. Fixed fees typically rise AUM, so they might range from $7,500 (for investments under $499,999) to $55,000 (for investments over $7.5 million). Hourly fees can be anywhere from $120 to $300 an hour, depending on the advisor and the complexity of the project.
How does that all break down? If you invest with a financial advisor, you can expect to pay on average 1.18% of the portfolio’s value over the course of the year. So, for example, if you invest $10,000, your advisor will charge $118 to manage that money. Consulting services, like making a financial plan and seeking advice, will generally cost you a few hundred dollars an hour, while hiring your advisor to do a special project can cost several thousand.
What Do You Get For Your Fees?
This is the big question. After all, these numbers aren’t necessarily cheap and it’s important to remember that a financial advisor’s fees come on top of any other market costs you might pay. For example, most mutual funds charge 1% or more in their own management fees. That means if you invest with a 1% financial advisor who puts your money into a 1% mutual fund, you’re paying 2% of your portfolio’s value every year in management fees.
In exchange, you can get several returns on that investment by working with a financial advisor. As a threshold matter, investors with a financial advisor can see better portfolio performance. Studies, conducted by the financial industry itself, have found that professionally managed portfolios tend to show a net gain of between 1.82% and 3% per year over individually managed assets. Importantly, by “net” gain, these studies refer to portfolio returns after accounting for advisor fees.
Of course, the benefits of working with a financial advisor can be seen qualitatively with the creation of holistic plan that helps investors make smart decisions and avoid emotional decision-making in attempts to time the market.
Does this mean that a financial advisor’s fees are always worth it? It depends on your finances and your goals. The more complicated your finances, or the larger your household, the more likely it is that a financial advisor is worth your money. If you have college, retirement and estate planning to do, as well as itemized taxes and a substantial amount of savings, the fees might make sense.
If you have a W-2, no dependents and you take the standard deduction, you might not need to pay someone 1% of your net worth to manage that money. It all depends on your needs and your goals.
But the key is this: Whether a financial advisor is worth it for you or not, or just not right now, it’s important to understand what they cost and why. Because not knowing is definitely a terrible reason to skip out on professional advice.
Only 16% of Americans say they understand what financial advisors charge for their services. It’s worth learning about how professional advisors charge for their time and portfolio management, and well worth deciding if those costs are worthwhile for you.
Tips for Hiring a Financial Advisor
- Financial advice is a fast-growing industry, with these firms taking the top slots.
- If you think a financial advisor might be worthwhile for you, SmartAsset’s matching tool can help you find a financial professional who serves your area to help you build a plan, manage your assets or even just talk.