How Much Do You Need To Hire a Financial Advisor?
Financial planning is an exhaustive field consisting of various subfields like estate planning, succession planning, debt planning, tax planning, education planning, health planning, and, most importantly, retirement planning. All of these require time and effort. However, they also require in-depth knowledge and expertise. This can be hard for all investors. Not everyone is born with a knack for finance. Moreover, personal and professional commitments, family responsibilities, and hobbies take a major chunk out of your day, leaving behind a small window to learn financial planning. But this does not mean that you cannot plan your present and future finances optimally. A simple way out here can be to hire a professional financial advisor who can help you create a financial plan that meets your financial needs and goals.
Getting a financial advisor can be extremely important. A financial advisor can lend you a comprehensive perspective, something that you may be lacking on several levels. They have the right experience and professional knowledge that helps you make the most of the given opportunities and use your income optimally to save and invest for the future. These professionals also help you pick out the most lucrative savings and investment options that can help you build wealth over time. The advisor can help you settle your debt in a disciplined manner. He can also help you employ tax-saving strategies to lower your overall liabilities and maximize your profits and earnings. In addition to all of these, a financial advisor also offers advice based on your age and life stage. This helps you cater to all of life’s changing needs. However, with all of these benefits, a lot of people still do not hire a financial advisor. In some cases, it is the lack of knowledge, and in most others, it is the lack of money.
The common perception when it comes to hiring a financial advisor is that it would be expensive. For this very reason, a lot of people also assume that financial advisors are only for the rich and high net worth clients. However, this is far from the truth. In reality, a financial advisor can add value to investors from all income groups. Irrespective of your goals, present income, age, or gender, a financial advisor may be important at different stages of life.
If you are wondering how much a financial advisor’s fee is and when you should get a financial advisor, this article can help you. So, keep reading!
How many types of financial advisors are there?
Before talking about the fee structure of financial advisors, it may help to first find out about the different types of financial advisors you can hire.
- Investment advisors: An investment advisor can provide investment advice to you. You can hire a person or a company as an investment advisor and get help on the most profitable investment options for you and your goals. Your investment advisor may also manage your investments and make entry and exit decisions on your behalf.
- Financial planners: A financial planner is someone who can help you with holistic financial planning. Instead of focusing on one aspect, these professionals offer comprehensive services and guidance on retirement planning, education planning, budgeting, investment planning, debt settlement, tax planning, etc.
- Wealth managers: Wealth managers are a type of financial advisors but for the wealthy investors. These professionals work with high net worth and ultra high net worth investors only. You can hire an individual wealth manager or a wealth advising firm based on your preferences. Since high net worth individuals require more intricate help with their affairs, they require wealth managers and not financial advisors. These professionals can help with services like investment planning, business succession planning, tax planning, estate planning, asset acquisition, and more. They can also help you with your philanthropic endeavors and social responsibility with charities and donations.
- Certified financial planner: A chartered financial planner (CFP) is a professional that can help you with services that may not require regulation. This can include budgeting, debt management, being financially disciplined, saving more and spending less, etc. These planners have a fiduciary duty to help you.
- Robo advisors: Robo advisors are new age, virtual advisors. These digital advisors can be hired online through mobile apps. They are not human advisors and instead use computer algorithms to recommend investments based on your inputs. When you hire a Robo advisor, you are required to fill a form. Based on this form, the Robo advisor assesses your risk appetite and recommends investments and savings options that align with your goals and investment concerns. Robo advisors are a convenient way to get expert advice, but they may not offer conclusive advice based on human intellect.
How do financial advisors charge, and how much is a financial advisor’s fee?
A financial advisor can charge fees in different ways such as:
- Robo advisor fees: The fees for a Robo advisor can differ for every app or firm. However, these financial advisors are the most affordable option on the list. If you are hiring a Robo advisor, you may have to pay anywhere from $10 to $50 per month. However, Robo advisors can charge you separately for administration fees, account charges, expense ratio, exit loads, and more for each investment.
- Hourly rate: Some financial advisors charge an hourly rate. So, if you hire a financial advisor for an hour, you will pay for that one hour alone. If you wish to extend their services, you can hire them for a longer time and accordingly pay more money. To hire a financial advisor on an hourly basis, you may have to pay between $120 and $400. The final cost can depend on the experience and qualifications of the professional, the reputation and popularity of the advising firm, the chosen service, etc. This can be ideal for you if you do not seek continued support. For times when you need an expert’s opinion, you can hire a financial advisor based on your requirement and pay them accordingly. However, keep in mind that in this case, the financial advisor will not monitor your investments or track your finances post consultation. After your meeting is over, you alone would be responsible for your finances.
- Flat rate: One of the most common methods of charging a fee is the flat rate. In this case, the financial advisor charges a flat rate for the investments they handle. This can range from $1000 and to $3000. The fee typically increases with an increase in the number of services you avail of. However, the flat rate is inclusive of service fees, account charges, administration charges etc. This is ideal if you wish to hire a financial advisor for conclusive support. In this case, the financial advisor will assist you on a continued basis taking care of every need like tracking your investments, monitoring the market and making timely decisions, tracking your goals and progress, employing strategies to reduce taxes, minimizing the scope of loss, and more.
- Wealth management fees: This fee may be higher than others. Since wealth managers work with high net worth and ultra high net worth clients, their fee is more elaborate than others. Wealth managers are in charge of multiple high value investments, assets, foreign investments, stocks, real estate, and more. Wealth managers may also deal with estate planning and business succession planning. This can require a long term working relationship. Moreover, wealth managers may work with high profile clients who demand an extreme level of privacy.
- Commission-based: Some financial advisors charge a commission based fee that is based on the investment they assist you with. Each investment can have a different commission. The commission can range between 1% and 3% depending on the type of investment. For example, the commission on mutual funds may be 2% but the commission on stocks may be 1%. So, if you would have to pay the fee as per the investments you have on your portfolio. Just like the hourly method, this method is also ideal for people who do not have a continued need for a professional. You can hire a commission-based financial advisor for specific investments you need help with. For example, a lot of investors may find investing in mutual funds simpler than investing in direct equity. But you have to be wary of the financial advisor’s recommendations too. Some financial advisors may only recommend a product with a high commission. This will help them earn more but may not benefit you equally. So, it may be advised to hire a fiduciary. A fiduciary has a legal obligation to place your interest over their own. This will ensure that you get useful advice always.
Hiring a Robo advisor can be good for beginners or part-time workers who are not so deep in financial planning yet. Robo advisors work on computer algorithms. So, they lack the human touch. They cannot take into account details like changing life responsibilities, change in investment temperaments, fear, anxiety, confidence, and more. All of these can play a crucial role in investing. But if you have a low budget and still want to get started, you can start with Robo advisors. Once you have a firmer hold on your finances and are better-versed with your investments, you can move on to a proper financial advisor.
Typically, wealth managers charge an annual fee on the total assets they manage. This can range between 0.5% and 1% of your total assets. So, the higher the number and value of the assets, the higher would be the advisor’s fee.
Hiring a wealth manager is ideal for people with large estates worth over at least $1 million. If you fall under this bracket and need help with estate planning, investment planning, tax planning, risk mitigation, portfolio rebalancing, and more, you may hire a wealth manager.
Do I need a financial advisor?
This question may not be so easy to answer. Typically, everyone can require a financial advisor at some point in their lives. As you grow old, start a family, change jobs, earn more money, etc., you also need to devise proper strategies to ensure that you are always financially stable. In addition to this, you also need to consider factors like inflation, health concerns, etc., and their impact on your future finances. This can be a tough call to make on your own. Moreover, given everything that is at stake, it may be better to take all measures that you can to safeguard your future financially. A financial advisor plays a crucial role here. Hiring a financial advisor can help you in several ways.
If you are still not sure if you need a financial advisor or not, ask yourself the following questions:
- Have I planned for my retirement?
- Have I made an estate plan yet?
- Do you find it hard to create a budget or reduce debts?
- Is your tax output too high?
- Have you planned for your children’s education expenses?
- Can you rebalance your portfolio?
Planning for the golden years of your life can indeed be hard. However, a financial advisor can help you in this journey. Retirement planning requires time, attention to detail, and alertness. While employer sponsored retirement plans like the 401k plan or others like the individual retirement account (IRA) can help you attain your goals to a certain limit, you also need to include other investments like mutual funds, exchange traded funds, stocks, bonds, real estate, and more. Picking the right option can be hard. But a financial advisor can recommend the right investments. Moreover, getting a financial advisor can also help with reducing taxes in retirement, beating inflation, planning your withdrawal strategy, buying insurance, and more. Likewise, a financial advisor can also help you make the most of your 401k and IRA. They can suggest if you should maximize your contributions. They can devise a withdrawal plan. They can also help you select the right investments within the retirement account. So if you find yourself wondering, do I need a financial advisor for my 401k, the answer is likely a yes.
Estate planning is an essential part of financial planning. It requires making a will, planning the distribution of your assets, buying adequate life insurance, setting up a trust, reducing estate and inheritance taxes, setting up health care directives, and more. All of this can require a lot of time and focus. Moreover, if you are a high net worth individual, you may require even more intricate help as the size and value of your estate can be bigger. A financial advisor can help you streamline your needs and those of your family and accordingly create an estate plan that helps you preserve your wealth for the generations to come. Estate planning can be a complicated process. For instance, you may have to set up a trust for minor children, you may need to create a power of attorney, and sometimes you may need to appoint a legal guardian. These legal and financial matters are best handled under the supervision of experts. A financial advisor ensures that the names of your beneficiaries are correctly mentioned and updated on all your accounts. If you have been remarried, widowed, or divorced, you may have to pay extra attention to your will so your will does not cause family feuds leading to legal hassles, such as probate. A financial advisor can guide you through all these procedures.
Budgeting may seem like a simple activity, but it can be cumbersome for some. Creating a realistic budget is important. Just cutting down on all expenses and living frugally may not be helpful. Instead, it may be better to take things slowly but ensure consistency. A financial advisor can help you create a suitable budget that allows you to save but also live comfortably without depriving yourself. Financial advisors can also help you reduce your debt. They can create a plan that focuses on clearing high interest debts on priority. They can also help you invest your money so you can fulfill your goals with investments rather than loans.
This is another question that can help you decide when to get a financial advisor. Taxes can lower your profits and incomes substantially. A higher tax bracket can strip you of your capital gains and negate the returns from your investments. Taxes can also burden your children when they inherit your estate. However, there are some ways to lower your taxes. A financial advisor can use strategies like tax loss harvesting, gifting, etc., to reduce your taxes.
As a parent, the education expenses of your children can be one of your prime responsibilities. College fees can amount to a lot, and if your child does not get financial aid from FAFSA (Free Application for Federal Student Aid) or a scholarship, it can be practically impossible to cover the fee without a student loan. Financial advisors can help you plan for your children’s higher education expenses with accounts like a 529 education savings plan, mutual funds, and more. They can help you create a budget that allows you to save for your child’s future needs. In some cases, you may also use your IRA for your child’s education costs. With the help of a financial advisor, you can ascertain the best ways to do so.
Deciding on the asset allocation and rebalancing your portfolio from time to time is essential to ensure that your goals are met within the stipulated time. Asset allocation refers to the distribution of your money among different asset classes like equity, debt, and cash. The right asset allocation can be decided based on your age and risk appetite. Moreover, it is important to also ensure that your asset allocation remains the same. This can be done by rebalancing your portfolio. Financial advisors can help you select a suitable asset allocation strategy. They can also help you rebalance your portfolio periodically.
These are only some of the questions. However, if you face any other financial issue that you cannot solve on your own, you can consider engaging the services of a financial advisor for a professional outlook.
The costs of hiring a financial advisor can be a major consideration. But it may help to look at a financial advisor as an asset and not a liability. These professionals can help you achieve your financial goals in a faster and simpler way than you can yourself. Moreover, they may also help you divert losses along the way by eliminating the scope of avoidable errors. With so many types of financial advisors and different ways to pay their fees, getting a financial advisor is also a lot easier and affordable.
So, if you are wondering when to get a financial advisor, a good time might be right now! If you are just starting out on your investment journey or do not have the requisite time to delve deeply into the world of finance to manage your investments, use the free advisor match service to search for fiduciary advisors near you. Based on your requirements, the platform scans through registered and qualified advisors to match you with an advisor suited to your needs and goals.