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A Guide on Financial Advisor Fee Structures and Costs

A financial advisor is the guardian of your money. The professional works with you to understand your financial preferences and offer guidance accordingly. In turn, you pay them an agreed amount for their services. In an ideal engagement, you and your advisor should both be happy. You should be confident in the financial services you receive and the money you are paying for them. You should have complete clarity about the different financial advisor fee structures and assess if the money you are paying is per the average financial advisor fee in the industry. According to a survey by the FINRA Investor Education Foundation, 14% of people do not know if they are paying a fee to their financial professional. 17% of investors have no idea about the amount they are paying towards investment fees. It is more surprising that 60% of people who work with a financial advisor think they are not paying anything for the advice. Regardless of how small your engagement is or how much advice you gain from a professional, the truth is that you have to pay a specific sum for the guidance according to the financial advisor fee structure. Whether you are working with a financial professional or looking to hire a new one, understanding the different fee structures in the industry is critical for informed decision-making.

Each financial advisor follows a different fee structure for their services. Some advisors, also known as fee-only advisors, get exclusively paid for the services they offer to you. Fee-only advisors further use other methods to charge their clients. If you engage with a fee-only advisor, you could expect to pay them per hour, a fixed-rate, or as per the AUM (Assets under Management). The last one also happens to be the most popular fee structure used by a fee-only advisor. Other professionals, also known as fee-based financial advisors, earn commissions on products you buy through them.

Both kinds of advisors – fee-only and fee-based – support wealth management, but they significantly differ in their functioning, working standards and principles, investment philosophy, and ethics. Each fee structure has its pros and cons. In some instances, hiring a fee-only financial advisor might be the perfect fit for your case, whereas working with a fee-based professional can be the right choice for you if you require only investment product suggestions or help with investing wisely. Irrespective of the advisor you choose, you would be liable to pay a certain sum for the services. As a wise financial planner, you should understand the different fee structures of these professionals, and determine which model works best for your situation and budget. You could also consult prospective financial advisors and enquire about how they charge fees to their clients to get a better understanding of different fee structures and costs.

Here is a quick guide on financial advisor fee structures and costs:

Understanding the different financial advisor fee structures

Broadly, financial advisor fees can be categorized into fee-only and fee-based models, explained below:

1. Fee-only advisors: Fee-only advisors are professionals who offer financial services and earn remuneration directly from you for the services rendered. This fee can be hourly, flat, or a percentage of the assets they manage for you (also known as the AUM method).  Fee-only advisors do not earn any commission or compensation from a third-party, such as investment companies, insurance firms, etc. These professionals adopt the fiduciary standards in their work, implying that they have a legal obligation to place your interest above their own. Fee-only advisors are likely to be more loyal to you in their services and offer counsel that benefits you primarily. They disclose all potential conflicts and work to minimize any clash. These experts give ideal advice and not just suitable counsel, which is a general risk when you engage with a fee-based advisor who earns a commission for recommending a financial product. 

Different types of fee-only advisors

  • Flat-fee: In the flat-fee model, the professional levies a fixed sum for their services for a specific duration. There is no restriction on the services they offer or the number of times you engage with them in this engagement period. For instance, a flat-fee professional could give you an annual financial advice quote, where you get financial counsel for the entire year. This fee ranges between $1,000 and $3,000 for a financial plan. 

  • Hourly-fee:If you do not have a complicated financial structure, the hourly-fee model might work for you. In this fee structure, the professional charges you per-hour for their services. You could engage with the expert for an hour or increase the duration as per requirement. The charges are levied according to the per-hour method. On average, the per-hour rate of a competent financial advisor is anywhere between $200 and $400 per hour. 

Assets under Management (AUM):One of the most popular fee structures used by the fee-only advisor is the AUM method. In this fee mode, the advisor levies a specific percentage of the assets they manage on your behalf. According to the SEC (Securities and Exchange Commission), AUM will comprise assets that are under the consistent and regular supervisory or management support of the financial advisor. Typically, the advisors charge 1-2% of the total assets they manage under this method. The percentage reduces as the AUM increases over time. If your advisor manages $200,000 on your behalf, they might charge you anywhere between $2,000 and $4,000 for their services. As your AUM increases, these professionals reduce their fee percentage, such as 1% for AUM $1 million, 0.75% for AUM $3 million, etc.

2. Fee-based financial advisor: A fee-based financial advisor is a professional who earns money via a fee paid by their client, as well as through commissions on products the client buys through them. These advisors earn money through every financial product you buy or accounts you open through them. These advisors may or may not get a fixed remuneration from you. Hence, their interest may or may not be aligned with yours holistically. Fee-based advisors earn money by maximizing their commission from the sale of products, such as insurance plans, mutual funds, stocks, etc. The more accounts you open or the higher the number of financial products you buy through them, the higher is their commission. Typically, the cost of investment management in this model ranges between 3% and 6% of your investment value.   

Fee-based financial advisors may or may not follow a fiduciary code of conduct. Further, their recommendations are subject to biases, and they might ask you to invest in a product only to maximize their commission. The commission is a part of the total cost of the investment, and you do not directly pay them any sum. Hence, their loyalty toward their clients can be questionable. However, because these advisors earn through commissions, they are much more cost-efficient than most fee-only advisors. There is no upfront fee in the fee-based model, and you are not obligated to pay them anything for their services. Fee-based get paid from the company whose financial products they sell. Another advantage of working with a fee-based advisor is that these professionals help you through the entire investment process – from selection to the final payment. You are not actively involved in buying or selling the products, which saves time and effort.

How much does a financial advisor cost?

Typically, once you understand the different fee structures of financial advisors, you can choose the one that best aligns with your needs. If you need someone to offer unbiased and holistic financial advice, the best suggestion is to hire a financial advisor who uses the fee-only structure to charge for their services. Even in this, it is preferable to choose the AUM fee structure. There are multiple reasons for opting for the AUM fee structure. You pay according to the assets they manage on your behalf and at a pre-agreed percentage. These advisors follow a fiduciary standard, and hence, the services they offer are unbiased and in your best interest. Further, if you compare the AUM charges with the benefits you get from these professionals, the benefits outweigh the cost.

According to Advisory HQ News Corp, in 2021, the average financial advisor fee was 1.02% for up to $1 million of assets under management. For high-net-worth individuals, who have a higher AUM balance, the average cost of a financial advisor is 1% at $1 million, 0.50% at $10 million, and 0.10% after that. So, a client with an AUM balance of $10 million can expect to pay $50,000 for professional financial advisory services. When you compare these costs with the benefits in light of the Vanguard report, the cost vs. benefit aspect is clearer. According to a Vanguard study, expert financial guidance can help boost investment returns by 3% each year. In another report by Russell Investments, the professional counsel of a financial advisor can improve average investment returns by 3.75% each year. In all, it comes down to paying 1% against 3% of returns, in which you stand to gain significantly. Apart from the monetary returns, your financial advisor offers various advantages, such as stress-free money management, less anxiety, better preparedness for future uncertainties, and more. Your advisor will offer holistic asset management services and a comprehensive financial plan in sync with your needs and preferences, updated at least annually.

Extra financial advisor costs that you might incur

Apart from understanding the basic fee structure used by the financial advisor for their services, you might also be liable to pay some additional fees over time. If you make any investments through the fee-only advisor, you might have to pay the commission on the product you buy. Account-opening charges, maintenance fees, and other expenses also fall in your liability. You would also be responsible for paying brokerage, if applicable. For instance, if you invest in mutual funds or ETFs (Exchange-Traded Funds), you will pay costs associated with these investments, inclusive of account-opening charges, administration costs, transaction fees, and more. As per a recent study, for a young investor, a 1% mutual fund fee can approximately amount to $590,000 over 40 years.

On the contrary, if you engage with an AUM-based financial advisor, you have to pay the custodial or third-party fees. These professionals use third-party custodial accounts to safe keep the assets they manage on your behalf. These advisors do not have direct access to your assets and can only make transactions through the third-party custodian after it is approved by you.

When discussing the fee structure with your financial advisor, ensure to factor in other costs and ask any questions upfront to avoid future hassles.

Where to find the financial advisor fee structures of different advisors?

If you want to understand how a particular professional charges for their services, you can look at their Form ADV, SEC-filed paperwork that explicitly depicts the fee model of the professional concerned. The form will display each type of fee the financial advisor charges for investment advisory services or otherwise. 

For this purpose, you can check Section 5 of the Form ADV.

If you dwell deeper into the Form ADV, you can read the Part II of the form, where advisory firms provide further details about their business, experience, expertise, fee models, code of conduct, and more. The brochure will also offer detailed insight into how the professional financial advisory fee is calculated.

Engage with a professional who charges a fair fee

When you engage with a financial advisor, you assess their credentials, experience, and expertise. But, it is also equally critical to check their fee structure and know if the amount they levy is fair and reasonable given the services they offer. Try to understand the financial advisor fee structure and what the services the fee includes. Check for any additional charges or costs applicable or any specific sum you have to pay to get a particular counsel or financial support, such as tax-related matters, legal help, etc.

Once you understand the cost part precisely, compare the fees with the industry benchmarks. You can also enquire from your friends and family regarding the price they are paying for financial advisory services. Ask your advisor to explain how they will add value to your account. If possible, request them to justify their fees. Ideally, the advisor should be able to give a relatable answer to this. If not, you could consider steering clear and considering other professionals who do not give roundabout or elusive answers to the vital question of how they plan to add value to your account.

If an advisor makes money through commissions, ask about their certifications and fiduciary duty to assess if they will work for your advantage. Know all compensation sources, and check if they are engaging with any third party to provide you additional services like tax management, estate planning, legal support, and more.

To summarize

Hiring a competent financial advisor is an investment for your future and one you should make early to maximize your chances of achieving holistic financial well-being. However, be sure to comprehensively understand the financial advisor fee structure and determine if they fit your requirements. You could try negotiating for a better rate as well.

If you want to hire a professional financial advisor who has been screened based on their fee models, use the free advisor match service and get matched with 1-3 vetted financial advisors that can help you with your unique financial needs and goals.

 

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The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice.
A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.