What Are The Costs Involved In Hiring A Financial Advisor?
Managing your investments well and making the right financial decisions takes time, skill, and effort. There can be a cost to delaying good financial decisions, such as putting off creating a good estate plan and likewise, prolonging poor ones, such as staying invested in a loss-making product. Additionally, managing your finances is a recurrent activity and not a one-time decision. For these reasons, it is a job that is best left to a financial advisor who can guide you along each step of the way.
With years of education and training, certifications and experiential knowledge, financial advisors can bring in a learned perspective into your financial plans. They can assess your financial profile and your risk tolerance and help you set financial goals that are suited to your needs. They can suggest savings and investment instruments ideal for your age and income and build a portfolio for you that will grow optimally with time. They can also help you manage your debt and reduce taxes.
However, the costs of hiring a financial advisor can put some people in doubt. Common concerns involved in hiring a financial advisor include: Is it expensive to engage a financial advisor? Should you pay a flat fee or will an hourly rate work better? What other pay models do financial advisors accept? What services do you get for the money you spend on hiring a financial advisor?
This article explores the costs and charges involved when you hire a financial advisor, so that you can be aware of your expenses well in advance and engage with an advisor who suits your financial needs.
Types of Financial Advisors who can Help you With Financial Planning
In order to know about the costs involved in hiring a financial advisor, you first need to know the different types of advisors and how each can help you in financial planning.
- Financial planners: A financial planner helps you strategize with your existing money to grow your wealth and ensure you have enough when you need it in the future. The role of a financial planner involves retirement planning, financial planning, investment planning, tax planning, etc.
- Wealth managers: Wealth managers usually work with wealthy investors. They offer the same services of a financial planner along with ensuring wealth preservation. Their common services include tax planning, estate planning, investment planning, charities and donations, insurance planning, and more.
- Chartered financial analyst: These professionals are certified by the Chartered Financial Analyst Institute of America and primarily offer advice on the different kinds of investments and their tax benefits and liabilities. They can help you achieve the optimal asset allocation on your portfolio and help rebalance it from time to time. They can also help with inheritance taxes.
- Chartered financial consultant: A chartered financial consultant can help with expenditure management. These professionals can help you with budgeting, debt management, and striking a healthy balance between saving and spending.
- Robo advisors: Robo advisors are digital advisors that use computer algorithms to manage your investments and savings. Several firms offer these services and you can find a robo advisor on the web easily. All you need to do is answer a few questions and enter some of your details like your income, risk appetite, goals, etc., based on which the system generates suggestions for appropriate investment and saving opportunities.
How Much Does a Financial Advisor Cost?
Financial advisors can charge you depending on whether you hire them on an hourly basis, monthly basis, or as per your income generated, and the type of services you expect from your advisor. Most financial advisors charge a fee based on a fixed percentage of the total value of your investment portfolio. The industry-average is 1% of your portfolio size.
- Flat rate charges:
Some financial advisors charge a flat rate. Flat rate fees too are generally derived from the estimated percentage of your portfolio size as discussed above. Flat rate fees normally start from $1,000 and go up to $3,000 for a one-time consultancy and creation of a single comprehensive financial plan. However, if your investment size is estimated close to $500,000, a financial advisor can charge you approximately $7,500. For an investment ranging between $500,000 and $1 Million, you would have to pay approximately $11,000, and for an investment of over $1 Million, you could be asked for a sum between $12,500 and $55,000, or more.
Average Annual Fees per Investment Amount for Flat-Fee Financial Advisors:
Investment Amount Average Annual Fee* One-time Financial Plan $1,000 – $3,000 Less than $500,000 $7,500 $500,000 to $1 Million $11,000 $1 Million or more $12,500 – $55,000+ *Estimated costs.
Source: Thervo
Flat fees cover a varied list of expenses like service fees, planning fees, account set up charges, etc. If you choose this method of payment, you generally pay the financial advisor to build you an exhaustive and wholesome plan inclusive of setting up your account and devising appropriate strategies to avoid pitfalls along the way. As mentioned, these are one-time engagement fees; i.e., you will need to monitor and maintain your account yourself.
If you require your financial advisor to also track your progress, monitor your losses (if any), and rebalance your portfolio occasionally to optimize returns, then you would need to engage your advisor on a retainer model thereafter. You would then have access to timely reports, ongoing personal advice, and plan modifications whenever necessary so as to assist you to reach your financial goals faster.
Every financial advisory firm has a Form ADV registered with the Securities and Exchange Commission (SEC). This form contains information on all of their fees. You can refer to this form to know exactly where your money is likely to be spent.
- Average hourly rate:
Some financial advisors charge on a cost per hour basis. This can typically range between $120 and $300 per hour. However, depending on the popularity and credibility of the financial advisory firm you choose, the figure can also go beyond $400 per hour too. Although this may seem expensive from one point of view, an hourly rate can be ideal if you need professional assistance on a precise task. You can opt for hourly rates for any financial service you want, such as estate planning, retirement planning, tax planning, debt management, budgeting, etc. However, similar to the flat fee, there is no tracking or monitoring from the financial advisor’s side after the plans have been made and delivered to you. Their job is simply to present you with a course of action. If you need further help on the same, you will need to hire them for more hours and pay per hour again.
*estimated amount
- Average wealth management fees:
This type of fee is charged by wealth managers. As explained above, wealth managers work mostly with high net worth individuals who require guidance in making large investments of $250,000 and above, or require assistance in specialized matters such as estate planning, risk management, charities and donations, and capital gains strategies. Wealth management is generally a long-term and ongoing commitment. As a result, these professionals charge an annual rate from their clients. This annual fee can be anywhere between 0.65% and 1% of the total assets. Note, however, that the percentage is not calculated on the total assets of the individual but rather on the assets the firm is tasked with managing. Very few firms bill clients on the basis of total net worth of the individual.
A wealth manager’s percentage charge is only one part of wealth management fees - i.e., the consultancy charge. In addition to this, you may be charged extra fees to set up accounts or cover the costs associated with use of particular financial tools or platforms.
- Average financial advisor commission fees:
A commission fee-based financial advisor does not charge you fees upfront, but a commission cost is incurred by the client (you) every time you make an investment. Financial advisors who work on commission-fee basis earn from the commission he or she gets for recommending and effecting the sale of products belonging to particular firms such as mutual fund houses and insurance companies. This charge therefore differs from investment to investment based on the type of the product you choose to invest in. These commissions do take away a portion of your returns, and over a long-term, possibly even a tidy sum.
For example, the commission fee for recommending mutual funds is observed to be between 3% and 6%. In the case of Assets Under Management (AUM), the commissions depend on the total size of your investment purchase. However, the relationship to the commission amount is inverse - that is, the more you invest, the lesser is the commission fees. AUM commissions may start at around 1.18% and taper down to 0.65% or lower as you continue to invest more.
Average Annual Commissions for Financial Advisors Based on Investment Amount:
Investment Amount Average Annual Commissions* Up to $50,000 1.18% or $590 Up to $100,000 1.12% or $1,120 Up to $150,000 1.09% or $1,635 Up to $250,000 0.65% to 1.07% *Estimated Percentage
Working with commission based financial advisors may be a little tricky. They are known to likely be driven by commissions and incentives, and for recommending products with a high commission rate that may earn them more money. Therefore, while such advisors may provide a solid financial plan, be wary of the products they recommend. On the other side, most commission-based advisors are also known to push high-risk products that have a high potential to earn you good returns. Additionally, unlike a fee-based advisor who only recommends products, a commission based advisor will execute the buying of the financial product on behalf of their clients.
Moreover, it is important to note that not all advisors are the same. It is advisable to hire a certified financial advisor from a credible firm to avoid such mis-selling practices. A financial fiduciary bound by duty and law to put your best interest above everything else can reinforce your faith in your financial advisor.
- Robo advisor fees:
A robo advisor is considered the most inexpensive of financial advisors. A robo advisor is essentially a computer program created by a financial advisory firm that assesses your investment requirements using algorithms and lays out an optimum plan depending on various factors ranging from macroeconomics to your personal finances. It helps to automate investments and trades, while you control the reigns to the amount of investment, the timings or duration of investment and the final selection of product based on your risk tolerance levels.
The cost of ‘employing’ a robo advisor may be charged as a management fee averaging around 0.25% to 0.89% of your total investment or a flat fee of around $10 on a monthly basis. Some firms also waive this fee if you meet their terms of investment such as maintaining a minimum balance of $100 in their account or make monthly $20 deposits.
However, note that this is only the robo advisor fee. There are other associated costs of investments, such as administration fee, account set-up charges, etc., that may come under the broad purview of management fees that will be charged over and above the basic robo advisor fee. Even if you find a Robo-advisor service that charges you a 0% in management fees, be wary that they may still charge you transaction fees every time you effect a transaction, custodial fees, fees towards automated tax-loss harvesting and the standard expense-ratio fee of the mutual funds themselves should you choose to invest in one.
It is also important to note that while robo advisors remove the personal motive of advisors to make money, and instead give you an objective decision framework to work with, they may lack a personal touch in their services that financial advisors provide. Since these are computer-generated financial plans, their ability to understand your changing needs is limited. They simply offer recommendations based on the information you feed in the system. This option can be good for someone just beginning their investment journey.
Here’s a consolidated table of the different fee structures that you can choose from:
Type of fee Fee charged Flat rate charges - Between $1000 and $3000 for a one time plan.
- May increase with an increase in the investment amount.
Average hourly rate - Between $120 to $400+.
- Charged per hour.
Average wealth management fees - Range from 0.65% to 1.65% of the total value of assets.
- Charged annually.
Average financial advisor commission - Between 1.18% and 0.65 percent.
- Charged per investment.
Robo advisor fees - Between 0.25% and 0.89 percent.
- Charged monthly/annually/ per investment.
A Comparison Between the Fees of Top Financial Advisory Firms
How much do Financial Advisory Firms Charge?
Despite knowing and understanding the basic costs, it can sometimes be confusing to find the suitable financial advisor for you. However, what fits one person may not fit the other one. So, here is a break up for costs as charged by some of the top financial advising firms in the country.
A disclaimer: These numbers are as of 2019. Numbers may also vary depending on the size of asset being invested.
- Edward Jones: Here are the details of how Edward Jones financial advisors charge their clients:
- A financial advisor at Edward Jones is paid 1% of the money you invest in equity and balanced funds.
- A fee of 2% of the stock value is charged for stock purchases.
- For Edward Jones Money Market Fund Investment Shares, you can be asked to pay $3 every month if your monthly balance goes below $2500.
- For Edward Jones Money Market Fund Retirement Shares, you will pay $3 if your monthly balance falls below $1500.
- Edward Jones Asset Management fees can range between 1.95% and 3.5%, depending on the term.
- Morgan Stanley: Morgan Stanley financial advisor can be hired on an annual basis or on a commission basis. They also provide wealth management services. Here are the details of how Morgan Stanley financial advisors charge their clients:
- An annual advisory fee of 0.35% of the total account balance for an investment of $5000.
- An annual fee of $100 to $175 for active asset accounts.
- An annual fee of $50 to $150 for every retirement account.
- An annual fee of 0.36% to 0.71% for money market trusts and government securities.
- An annual fee of $50 to $120 as basic security.
- A fee of 0.15% to 2.85% for equity plans with an investment between $5 Million and $10 Million.
- For a LifeView Plan with a value higher than $5 Million, the financial advisor fees can be approximately $10,000.
- Fidelity: Here are the details of how Fidelity financial advisors charge their clients:
- A trading fee of $0.65 to $4.95 per trade and $1 to $14 per bond.
- An annual investment advisory fee of 0.50% to 1.05% for an asset value of $2 million.
- A fee of 0.35% as advisory charges for Fidelity Go® Robo-advisors.
- An advisory set up fee of 0.50% for Fidelity Hybrid Robo.
- Charles Schwab: Here are the details of how Charles Schwab financial advisor charge their clients:
- A minimum trade fee of $4.95 to $12.95 and a maximum of 10% for electronic trades.
- A minimum broker fee of $0.04 per share for stocks costing up to $4.00.
- A flat fee of $30 for an investment of up to $2500 for broker trades.
- A fee of $25 to $45 for mutual fund transactions for electronic trades and $45 to $65 for broker trades.
- A fee of $0.20 per bond for fixed income investments.
- No annual fee for a minimum investment of $5,000 with Robo-Advisors with Schwab Intelligent Portfolios®.
Which Financial Advisor and What Kind of Fee Model is the Best for you?
Choosing the right financial advisor will depend on your age, income, risk, budget and financial goals. Here are some important things to know about each type of financial advisor based on their fee model that can help you make the right decision:
- Fee-based financial advisors: This is a convenient form of payment. The flat rate is predetermined and there are no last minute costs added to the bill. You know exactly what you will be paying and paying for. Fee-based financial advisors can charge based on the total assets that you need work on. So, the higher the value of your assets, the higher could be their fees. It may help to consult a financial advisor that follows fiduciary standards, so that they keep your interest above their own and offer you sound financial advice at all times.
- Commission-based financial advisors: A commission-based financial advisor may not suit all investors. For someone looking for a long-term investment strategy, a commission-based advisor might be an expensive pick. Since the professional will charge you for each investment tool, the overall costs can be quite a lump sum here. However, a commission-based financial advisor could possibly be a great match for someone looking for a short-term strategy. Investors who are just starting out and do not have many investments in their portfolio may choose commission-based professionals. You will pay per investment and save unnecessary costs associated with long-term annual or monthly fees. Also, the added edge of getting the transaction effected instead of having to do it by oneself is another plus point for the commission-based advisory service.
- Robo advisors: Robo advisors are a low cost option when it comes to hiring a professional. They charge low fees and can suit any budget or income group. However, they are ineffective in providing you with a customized plan. In addition to this, you cannot rely on them for personalized advice. Their recommendations are mechanical and do not account for human emotions that can sometimes influence financial decisions.
Is it Worth Hiring a Financial Advisor?
While hiring a financial advisor and paying them a fee may seem like the opposite of making money, it is essential activity to ensure your overall financial growth. Despite the easy accessibility of financial newsletters, online classNamees on investing, seminars, etc., it can be nearly impossible to achieve a professional level of knowledge and know-how of the financial world to invest for oneself. With increasing professional and personal commitments and responsibilities, you may not always have the time to find profitable opportunities to save, invest and grow your funds. Timing the market, intraday trading, making the most of changing contribution limits, etc. can be quite a handful and overwhelming at the least. This may lead to losing out on opportunities that could have benefited you immensely. Moreover, the bigger your assets or estate grows, the harder it can be to manage it.
A financial advisor can help you in several ways. Here are some of them:
- Retirement planning: Retirement can be a challenging phase of your life. You no longer have an income to fall back on. Your life’s savings and investments are the only financial source in retirement. A financial advisor can help you save optimally for your retirement. They can suggest retirement accounts with the least tax liabilities, flexible withdrawal rules, and steady interest rates so that your money invested in your earning years grows with time.
- Tax planning: As you grow your wealth, the implications of tax on your assets can be severe. An increase in your income will result in a rise in your taxable income too. Moreover, a chance inheritance can also put you in a higher tax bracket all of a sudden. This is why it is important to have a tax plan in place. Systematic investments, insurance, etc. can offer tax benefits and a financial advisor can help you choose these without hampering your short term plans.
- Debt management: Debt can put your long-term financial growth in jeopardy. High interest rates of loans and mortgage can be a burden on you. This also affects your long-term savings and future investments. Remember, the more debt you have, the lower is your credit score. A low credit score can impact you in several ways, like reducing your chances of getting a new loan, affecting your prospects of employment, etc. A financial advisor can advise on short-term money making investments rather than loans to meet your goals.
- Budgeting: Some of the basic principles of financial planning involve budgeting and using your income wisely. Yet, most people fail to do so due to pressing needs, family requirements, and other routine expenses. A financial advisor can help you plan your expenses better. They can suggest ways to reduce unnecessary expenditure, invest in fixed income investments or aggressive investment instruments like stocks, etc. as per your risk appetite and future goals.
- Portfolio diversification: Diversification plays a crucial role in your financial growth and wealth creation. Diversification can reduce risk and offer better returns. However, it is essential to know the right level of diversification needed to garner benefits from this strategy. Over diversification or under diversification can negate the effect of strategy in the first place and sometimes even lead to losses.
- Portfolio rebalancing: Portfolio rebalancing refers to moving around the composition of your portfolio to adjust the risk quotient and bring it back to its original risk-reward status. For instance, if you had a 50:50 ratio of stocks and bonds on your portfolio when you started investing, that has now changed to 60:40, you may need to rebalance your portfolio to meet your original asset allocation (if your risk tolerance level has not changed). A financial advisor can run this check for you periodically and suggest relevant changes, so your portfolio never loses its value.
To sum it up
A financial advisor can help you choose investments that can help you build your wealth. They help manage your estate, inheritance, debt, taxes, and a lot more. Not only this, they also monitor your investments, suggest different strategies as per your existing needs and future requirements, and rebalance your portfolio as needed, to ensure that you meet your target in the stipulated time. Do not look at the cost of hiring a professional financial advisor as an unnecessary expense, but rather view it as an investment you are making to safeguard your wealth and grow your corpus for the future.
If you are looking for an advisor who can help you with financial planning, retirement planning, tax planning, wealth creation or preservation, estate planning, etc. use Paladin Registry’s free matching tool to find and compare vetted financial advisors that are best suited to your financial needs and goals.