As you strive to reach your financial goals and prepare for retirement, you may consider working with a financial advisor.
For many, this can be a smart financial move.
But you may be wondering: How much does a financial advisor cost?
Generally, financial advisors charge a flat fee of $1,500 to $2,500 for the one-time creation of a full financial plan, or 1% to 2% of assets under management for ongoing portfolio management.
However, fee rates and compensation structures differ between advisors. 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 know to make sure you fully understand financial advisor fees before you hire one.
Understanding Financial Advisor Fee Structures
There are five main ways 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 vary based on the amount of assets under management
- 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. 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?
If you’re interested in working with a financial advisor, most firms charge fees based on a percentage of assets under management (AUM) for ongoing portfolio management.
The average financial advisor cost is 1.02% of AUM for a $1 million account, which amounts to about $10,200 per year, according to a 2017 AdvisoryHQ study.
Asset-based fees may decrease as the account amount increases, ensuring high-net-worth individuals are still paying a fair rate. However, this also means 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.
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. Average hourly fees can be anywhere from $100 to $400 an hour, depending on the advisor and the complexity of the project.
The financial advisor cost might not be all you pay if you open an account with a financial advisor. In addition to paying the advisor, you’ll may also be responsible for third-party fees and other costs.
For instance, if a financial advisor uses mutual funds or exchange-traded funds (ETFs) in your account, you’ll have to pay costs associated with those funds in addition to the fee you pay your advisor.
And 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%. A NerdWallet analysis found that a 1% mutual fund fee can cost a young investor as much as $590,000. When you ask your financial advisor about his or her fees, it’s important to ask about any additional costs you may incur.
Robo-Advisor Fees vs. Traditional Advisor Fees
If you’re concerned about the financial advisor cost you may have to shoulder, you might consider working with a robo-advisor as opposed to a traditional 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 assets under management.
Of course, you’ll be getting different levels of service from each type of advisor. Though both provide investment guidance and portfolio management, with a robo-advisor you won’t get financial planning advice and guidance on topics like estate planning and college savings planning. You’ll have limited access to humans with a robo-advisor, as robo-advisors are concentrated online.
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 that they need advice on.
If this sound like your situation, we’ve made it simple to get in touch with a financial advisor. All you have to do is answer these few questions about your finances and we’ll match you with as many as three financial advisors in your area, tailored to your specific needs and goals.
Where to Find Info on Financial Advisor Fee Structures
To figure out what fees you may face and the financial advisor cost you’ll endure, look at the firm’s Form ADV (SEC-filed paperwork). On this form, a firm must clearly note each fee type it charges for investment advisory services.
On Form ADV Part I 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, the firm will typically 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 much the firm’s fees cost.
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 it 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 any advisors give a roundabout or elusive answer, steer clear. It’s a red flag if an advisor tells you not to worry about costs. Ditto if the advisor implies 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 an advisor's 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 in assets under management pay a larger 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, seek a fee-only financial advisor rather than a fee-based advisor. 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.
Follow these steps to find a fiduciary financial advisor near you:
- Answer these few quick questions about your current financial situation.
- Sit back while our tool matches you with up to three advisors who can provide expertise based on your specific goals. It only takes a minute.
- Check out the advisors' profiles, interview them on the phone or in person and choose which one you want to work with in the future.