A financial advisor provides financial advice or guidance to customers for compensation. This includes a number of services such as investment management, tax planning, andestate planning. Because there are various ways financial advisors can charge for their services, new clients are often perplexed by how much they should expect to pay. Here we explain the five most common ways financial advisors charge for their services.
Key Takeaways
- Financial advisors charge fees for providing their clients with guidance on a number of services such as investment management, estate planning, and retirement planning.
- Commission-based advisors receive fees when their clients purchase financial products that the advisor recommends.
- Some financial advisors charge by the hour or by the project for their services.
- Financial advisors whose fees are based on assets under management (AUM) will charge a percentage based on the client's net assets they manage.
- Fee-only financial advisors do not accept commissions for products sold; instead, they charge by the hour, by the project, by assets under management, or some combination of these.
Assets Under Management (AUM) Fees
Financial advisors who charge based on an assets under management (AUM) fee structure will charge their clients a percentage based on the total dollar amount of the assets they manage. The more assets clients have, the lower the percentage they pay for advisory services, although the total dollar fee they pay increases.
Setting Expectations: AUM Fees
Traditional in-person financial advisors typically charge at least 1% of AUM for advising services. This rate is much lower for robo-advisor services.
Hiring an AUM financial advisor is usually the most expensive route for clients. However, the benefit for clients is that this fee structure gives advisors an incentive to not take huge risks or ones they would not take with their own money. Since advisors receive a percentage of the clients' assets, they have an interest in managing their clients' portfolios very well.
Commission-Based Fees
Financial advisors who are commission-based receive a fee or compensation based on product sales. They receive fees when their clients make a specific financial transaction that they recommend, such as purchasing a stock or other asset.
Setting Expectations: Commission Fees
Investors typically don't pay the commission fee to their advisor. Instead, the product sponsor pays the commission. Insurance products may pay double-digits for the initial contract with as much as 5% per year as long as the contract is active. Mutual funds may pay up to 1%, and annuities range from 1% to 10%.
For some commission-based advisors, providing financial planning services or advice to their clients may be secondary to selling financial products. A common criticism of commission-based advisors is that they have a conflict of interest that leads them to recommend financial products that may not always be in the best interests of their clients.
Hourly Rates
Advisors can also charge clients per hour rather than commissions or a certain percentage of assets under management. It all depends on the type of advisory services a client needs.
Setting Expectations: Hourly Rates
Advisors will often charge at least $100/hour as their hourly rates. It is not uncommon to see more experienced advisors charging hundreds of dollars per hour.
Rates can vary depending on the experience of the advisor and if the advisor has a highly valued area of expertise. The total fee could range from $2,000 to $5,000 on various projects such as generating an estate plan for a client.
Flat Fees
Financial advisors who charge a flat fee will frequently provide their clients with a list of services and the fees they charge per service. Self-directed investors tend to pay advisors flat fees or go with hourly rate payment plans. They oftenonly seek suggestions from advisors or the option to use complicated asset allocation models.
Setting Expectations: Flat Fees
Flat fees vary on the level of service you are seeking. For simple suggestions and general oversight, an advisor may charge between $1,000 to $2,000. A greater level of service will warrant higher fixed fees or a blend of fee types.
Another set of investors may want advisors to take control of their portfolios and make all the decisions for them. These investors tend to have less of an understanding offinancial matters.
Fee-Only
Fee-only financial advisors do not accept commissions or compensation based on product sales. Fee-only advisors can structure their fees in a variety of other ways. They can charge by the hour, by project, by assets under management, or some combination of these. Because their income does not come from selling financial products, fee-only advisors are often seen as being less biased and more focused on giving clients personalized advice based on the client's financial goals and best interests.
What Is the Typical Cost of a Financial Advisor?
The cost of a financial advisor will greatly vary on the firm, the fee structure, and your geographical location. It is not uncommon to see hourly fees in excess of $100/hour, commission percentages 1% or greater, or annual fixed fee retainers for high-net-worth individuals greater than $1,000.
Is It Worth It to Hire a Financial Advisor?
Every investor is different - for some, it may make sense while for others it might not be worth it. If you are struggling with not knowing how to get started or want to explore opportunities of potentially having your investments generate greater income, it can be worth discussing with a financial advisor.
Can You Negotiate Financial Advisor Fees?
Yes, financial advisor fees are negotiable. Be prepared to demonstrate why you feel the advisor's fees are too high. You may have more leverage over the fees you are charged depending on the size of your investment portfolio.
The Bottom Line
A good rule of thumb for investors to consider when reviewing the fee structures of various financial advisors is to first consider exactly what you'll want your advisor to do for you and the amount of involvement you expect to have in the process.
If you have a simple project in mind—such as getting advice on portfolio management as you get closer to retirement—you might be fine with hiring a financial advisor on an hourly or flat fee basis. On the other hand, if you require comprehensive wealth management services and hope to establish a long-term relationship with a financial advisor, you might consider an AUM or fee-only arrangement.
As a financial expert with a deep understanding of the intricacies of financial advisory services, I bring firsthand expertise and knowledge to shed light on the concepts discussed in the article. My experience encompasses various aspects of financial planning, investment management, and advisory fee structures.
The article outlines five common ways financial advisors charge for their services, providing valuable insights for individuals seeking financial guidance. Let's delve into each concept mentioned in the article:
1. Assets Under Management (AUM) Fees:
Financial advisors who utilize the AUM fee structure charge clients based on a percentage of the total dollar amount of assets they manage. The article highlights that the more assets clients have, the lower the percentage they pay, though the total dollar fee increases.
Key Takeaways for Clients:
- Traditional in-person financial advisors typically charge at least 1% of AUM.
- Robo-advisor services usually have lower AUM fees.
- AUM fees incentivize advisors to manage clients' portfolios effectively.
2. Commission-Based Fees:
Advisors operating on a commission-based model receive compensation based on product sales. This involves fees generated when clients make specific financial transactions recommended by the advisor.
Key Takeaways for Clients:
- Investors typically do not pay the commission fee directly; instead, the product sponsor covers it.
- Potential conflict of interest as advisors may prioritize selling products over providing comprehensive financial advice.
3. Hourly Rates:
Some financial advisors charge clients on an hourly basis, providing advice and services as needed. The hourly rates can vary based on the advisor's experience and expertise.
Key Takeaways for Clients:
- Hourly rates often start at $100/hour, with experienced advisors charging higher rates.
- Total fees can range based on the complexity and scope of the project or advice sought.
4. Flat Fees:
Financial advisors employing a flat fee structure offer a list of services with corresponding fees. This model is suitable for self-directed investors or those seeking specific advice without ongoing portfolio management.
Key Takeaways for Clients:
- Flat fees vary depending on the level of service, with simpler services commanding lower fees.
- Investors seeking comprehensive portfolio management may incur higher fixed fees.
5. Fee-Only:
Fee-only financial advisors do not accept commissions for product sales. They can structure fees based on hourly rates, project fees, AUM, or a combination.
Key Takeaways for Clients:
- Fee-only advisors are often considered less biased, focusing on clients' best interests.
- Fee structures are flexible, allowing for customized arrangements based on client needs.
Additional Insights:
The article provides guidance on the typical costs of financial advisors, considerations for hiring one, and the negotiability of advisor fees.
Typical Costs:
- Costs vary based on the firm, fee structure, and geographical location.
- Hourly fees, commission percentages, and fixed fee retainers for high-net-worth individuals are highlighted.
Worth Hiring a Financial Advisor:
- Depends on the individual investor's needs and goals.
- Seeking advice for getting started or exploring income-generating opportunities may justify hiring a financial advisor.
Negotiating Financial Advisor Fees:
- Fees are negotiable, with negotiation leverage tied to the size of the investment portfolio.
- Investors should be prepared to justify why they believe the advisor's fees are too high.
The Bottom Line:
The article concludes by advising investors to carefully consider their needs and the level of involvement required before choosing an advisor and fee structure. It emphasizes the importance of aligning the chosen structure with the scope of services and the investor's long-term goals.
