How Much Does a Financial Planner Cost, and Is Hiring One Worth It?
Managing your finances can be tricky. Everything, including understanding your financial goals, choosing investment modes, allocating your money in the right assets, adopting efficient tax-management strategies, creating a comprehensive retirement plan, and framing an optimal estate plan, requires a level of financial expertise and management. Given that financial matters can get complicated, timely financial planning is key to ensuring a secure financial future.
If you do not have the time or the expertise to plan your finances and related monetary matters, it is best to hire a professional financial advisor. Financial advisors, also known as financial planners, are skilled professionals who can offer expert guidance and advice on personal finance and wealth management. Depending on their area of expertise, a financial advisor can help you with creating a budget, managing your debt, and optimizing your taxes to create a significant retirement corpus, or planning your future healthcare needs. That said, a good financial planner not only offers sound advice but also helps you save time and reduce stress, among other benefits.
However, despite providing significant benefits, many people still wonder if hiring a financial planner is worth it. With so much free advice on the Internet, it may not always seem wise to pay someone. Moreover, seeking advice from a financial advisor approximately costs you 1% of your Assets under Management (AUM) each year. But, when you compare the advantages of hiring a financial advisor with their costs, the former outweighs the latter by a significant margin. There comes a time when paying for professional financial advice becomes a solid investment rather than an expense. According to Vanguard, expert financial advice can help you boost investment returns by 3% each year. This edge is also known as the "the advisor’s Alpha". The same analysis has been confirmed by Russell Investments. In fact, as per Russell Investments, a skilled financial advisor has the potential to increase your returns by 3.75% each year. Now, when you compare the increase in returns with the cost of hiring a financial advisor, you may assess if a financial planner is worth it or not.
Here is everything you need to know about how much a financial planner costs and if hiring one is worth it:
How much does a financial planner cost?
To know what a financial advisor will cost and if they are worth it, you will need to understand the different fee structures financial advisor’s use with their clients.
Some of the most common fee structures used by financial advisors to charge for their services are:
- Percentage of assets:
- Hourly charges:
Financial advisors who use this fee structure charge you for each hour of advice they offer. The more help you need, the higher sum you will pay as compensation to the professional. In this method, the average income for financial advisors ranges between $120 and $400 an hour. The hourly rate fee structure works best for clients with less complicated financial planning requirements. Paying by the hour can also be a great choice if you want counsel but want to execute the plan yourself. However, if you want the advisor to guide you through the process, the fee could add up to a significant sum. Moreover, if your advisor is highly experienced or skilled, you can expect to pay a higher per hour charge for the same financial services. But since an hourly fee structure is not tied to any specific investment product or the value of your investments, the advice you receive will more likely be objective.
- Flat fee or fixed fee:
- Retainer fee:
One of the most common methods that financial advisors use to charge for their services is a percentage of the assets that they manage on your behalf. This fee model is also known as AUM. AUM refers to the market value of the assets managed by the financial advisor. In this method, the average pay for financial advisors ranges from 0.50% to 2% per year. However, this model works on a sliding scale. As the value of AUM increases, your financial advisor will likely charge a lower percentage for the same financial advisory services. According to financial experts, if a financial planner charges 1% for $1 million AUM, the fee can likely come down to 0.50% at $10 million AUM. This implies that if your advisor manages assets worth $10 million on your behalf in the future, you would only be paying $50,000 in the whole year for their expert advice. This figure is reasonable when compared with the absolute returns of your portfolio. Many investors prefer the AUM method because the fee is deducted directly from their accounts, and no cheque has to be issued. Moreover, there is no pressure on the monthly budget. If the financial advisor gets compensation from a tax-deferred account, like an IRA (Individual Retirement Account), it is more beneficial because the deduction will reduce the account balance and the taxes for withdrawals.
In a flat or fixed fee model, you pay the financial advisor a one-time charge for their services. For instance, you hire a retirement financial advisor when creating an initial retirement plan. You choose the flat-fee model and fix the retirement financial advisor salary along with the scope of services. In this case, the financial advisor helps fulfill the specified agreement of services, and the contract terminates. The flat fee varies depending on the project, level of services, and experience of the concerned financial advisor. Typically, the retirement financial advisor salary may be anywhere between $700 and $3,500. One of the advantages of paying by the flat-fee method is that you precisely know how much you will shell out from your pocket. This helps you budget effectively while getting the financial help you need. Also, flat-fee models are not tied to any specific financial products, offering you objective counsel.
As per this fee structure, the financial advisor will charge you a flat fee at predefined intervals, such as quarterly or annually. In this model, you pay a flat fee to retain the services of a financial advisor for a specific duration. This fee structure is useful when your financial situation changes frequently and is usually more complex. For instance, you need to constantly draw a regular income from your investments or run a small business while minimizing taxes. This type of fee model is also suitable if you have multiple rental properties. The exact retainer fee depends on the scope of services and the experience level of the professional you are hiring. The average pay for financial advisors in this category ranges from $2,000 to $10,000 per year. It can be higher if your financial situation is complex.
Commission-based financial advisors only earn through the financial products you buy through them. These advisors do not charge any fixed, retainer, hourly, or asset-based fee. Their primary income is from the financial products they sell. So, the more financial instruments (company shares, bonds, insurance policies, mutual funds, etc.) they sell, the higher is the income. Generally, the average pay for financial advisors or the commission they earn is anywhere between 3-4%. For instance, if a financial planner asks you to invest $2,000 in a mutual fund option that levies a 5% commission, you would pay $100 as commission to the advisor and invest $1900 in the mutual fund. Commission-based advisors are beneficial for you if you wish to invest in a particular financial product and want sound advice. They are also more cost-efficient compared to other financial advisors. They are independent contractors and can potentially offer more diverse financial instruments. Also, commission-based financial advisors actively manage the entire purchase-sale process. You do not have to be actively involved in the matter in case you do not want to. However, you may not always be able to trust a commission-based advisor. These professionals do not have any fiduciary duty. Hence, they are not obligated to act in your best interest at all times. Commission-based advisors might offer biased counsel only to serve their motives.
Apart from these five types of fee structures, some financial advisors can adopt other models like performance-based charges or a mix of commission-based and fee-only models (together known as a fee-based fee structure). In the former, the professional levies an additional fee if a specific performance benchmark is achieved. In the fee-based fee structure, the advisor can charge you a percentage of your AUM for the investment services and levy a commission for the financial products they sell. Alternatively, financial planners can combine one or two fee-only methods to charge for their services. Fee-only fee structures include hour-based pay, AUM method, retainer fee, and flat or fixed fee.
Once you understand the fee structure your financial advisor uses to charge for their services, you will need to understand other related costs as well. These charges might not be directly associated with your financial advisory services but form a part of your overall financial plan. For instance, you will be liable to pay brokerage, custodial, and other third-party fees. If you invest in a mutual fund through your financial planner, you will need to pay costs to invest in the mutual fund in addition to your financial advisor’s fee.
When engaging with a financial advisor, get the comprehensive cost estimate, including additional charges, if any.
Traditional versus Robo-advisors
Apart from understanding the cost involved in hiring a human professional financial advisor, know how much an alternative advisor, such as a robo-advisor, will cost you. Generally, robo-advisors charge a lower fee than their human counterparts that comes around to 0.25% to 0.89% of your AUM. This fee is highly cost-effective when compared with traditional financial advisors. However, the level of service offered in both cases also differs. Robo-advisors are digital platforms that deploy advanced computer algorithms to offer automated investment advice aligned with your goals and risk preference. Robo-advisors use an online questionnaire to know your financial goals, objectives, risk preference, etc. These advisors use defined computer algorithms to assess your information to offer sound investment advice and build an optimally diversified portfolio.
Even though robo-advisors charge low fees, they only offer limited personalization of financial advice. They have limited expertise in financial management and can only provide standard services, such as portfolio creation, opening a mutual fund account, etc. Robo-advisors are meant for the masses and have restricted flexibility. There is no human interaction, and the advice they offer is based on a dated investment theory. These types of advisors are suitable for people with a low bank balance and less complicated financial situations.
How much money can a financial advisor help you save?
Despite understanding the importance of hiring a financial advisor, most people think of it as an expense. However, engaging with a financial advisor is an investment rather than an expense, even for those with budget constraints. For instance, assume you pay anywhere between $1,000-$2,000 for professional financial advisory services. This advisor helps you improve your investment returns by $2,000 and boost your retirement savings by $2,000 a year. In this case, you will stand to potentially gain $2,000. Hence, calculate the benefits of hiring a financial advisor before completely ruling out the thought. You can also hold a pre-contractual meeting with the concerned financial planner to understand what they can do for you.
How do you know if hiring a financial advisor is worth it?
The best way to examine if working with a financial planner is worth the cost is by listing down the pros and cons of the relationship. Moreover, weigh the cost of hiring an advisor with your returns and your overall net worth. If a financial advisor has successfully added value to your wealth through their counsel or services, then hiring one can be beneficial for you. Moreover, if the advisor empowers you to achieve financial goals (such as buying a house, creating a retirement corpus, drafting a holistic estate plan, etc.) and gives you peace of mind, then the money you are paying to your advisor is worth it.
In most cases, the professional advisory services justify the cost because of the numerous advantages you get. You benefit from holistic tax management, efficient retirement planning, profitable portfolio management, etc. Even though you might not need all financial services presently, you will require professional help in these complicated matters as you advance in life.
For instance, you might have a successful business and feel like you do not need professional advice in financial matters. However, if you want to transfer your business and other estate assets to your children, without excessive tax charges or the process of probate, you can consider hiring a financial advisor. A competent financial planner can help you create a holistic estate plan to ensure that you retain your monetary hold when alive and that your estate passes to your heirs with minimum taxes and legal hassles. Your financial advisor will also help you engage with an attorney to discuss the will drafting process, trust creation, etc. Further, if you want to relocate your business or have a comprehensive health care plan for your future, your financial planner will be of assistance in this regard too.
What qualities should a worthy financial planner possess?
If you think the cost of a financial advisor fits your budget and your holistic financial plan, you can go ahead to hire one for your needs. However, a good financial advisor should suit your budget and possess necessary qualities and competencies, such as:
- Sound qualifications, educational background, and certifications.
- Expertise in providing financial planning services – generalized or specialized.
- Ability to work coherently, and understand your needs, financial situation, life goals, risk tolerance, investment preferences, etc.
- Intent to place your interest above their own and offer suitable advice. Such advisors are commonly known as fiduciary advisors. Most fee-only financial advisors are fiduciaries.
- Dedicate adequate time and communicate effectively and frequently to answer financial queries and offer required guidance.
- Being transparent and upfront about the fee model and any additional charges involved.
- Aim to maximize portfolio returns and improve your wealth while minimizing taxes in the long run through efficient strategies.
- Apprise you of the market developments and deploy appropriate measures to minimize losses and take advantage of lucrative opportunities.
- Keep the long-term vision in mind and avoid panic-based decision-making.
- Become the focal contact for all money-related matters.
The most effective way to understand if a financial planner is worth the cost is by examining the difference they make to your financial situation. If the benefits outweigh their fee, you can consider hiring one. However, merely restricting your decision to how much a financial advisor costs is not recommended. In addition to the cost-return analysis, you should ideally check if the professional can reduce your financial worries and bring you peace of mind regarding your future financial security. Hiring a competent and qualified professional financial advisor is a sensible decision for your future. So, make sure you hire one at the earliest!