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How Much Does a Financial Advisor Cost?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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When you start looking for help with your investments, one of the most common questions is, “how much does a financial advisor cost?” The exact amount you’ll pay depends on the advisor’s fee structure.

For advisors who charge a percentage of your account balance, the standard cost is an annual fee of 0.50% to 1.25% of your assets under management. If your financial advisor charges an hourly fee, you should expect to pay between $100 and $400 per hour.

It’s important to pay attention to the overall financial advisor cost, as it can cut into your portfolio’s value and returns.

The average cost of a financial advisor

Hiring a professional financial advisor can be an excellent investment to ensure you’re on track to reach your goals and build long-term wealth. However, the cost of using a financial advisor can vary widely.

How much you’ll pay for a financial advisor is dependent on several factors, including:

  • The size of your portfolio
  • Whether your account is actively managed or passively managed
  • If you’re using a human advisor or a robo-advisor
  • The advisor’s fee structure

Additionally, the financial advisor fee is only part of your total cost; you may also have to pay costs associated with investing, such as trading fees, fund fees and expense ratios. It’s important to make sure you keep those other costs in mind when comparing investment firms.

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Cost of a human advisor vs. a robo-advisor

While robo-advisors tend to be cheaper than human financial advisors — Betterment’s annual fee starts at just 0.25%, for example — there’s generally less service and fewer investment options. With Betterment, you can only invest in exchange-traded funds (ETFs), whereas you can invest in stocks, bonds, mutual funds and real estate investment funds with a human advisor.

Additionally, with a human advisor, you get access to a professional financial advisor who will work with you to develop a personalized financial plan and investment advice. With a robo-advisor, you answer a few questions only about your goals and risk tolerance, which the program then uses to create and automatically rebalance an investment portfolio of ETFs for you.

You’ll want to consider your own financial situation and goals to determine whether the higher level of service provided by a human advisor is worth the higher cost.

Types of financial advisor fees

When it comes to financial advisor fees, there are several different ways an advisor may get paid. Some advisors charge a combination of fee types rather than just one, so make sure you ask about all of the different fees they charge before signing an agreement.

Average Rates of Different Financial Advisor Fee Types

Fee TypeAverage Rate
Percentage of assets under management0.50% to 1.25%
Hourly charges$100 to $400 an hour
Fixed fees $1,500 to $7,500
Commissions3% to 6%
Performance-based fees0.10% to 0.75% (in addition to base fee)

A percentage of assets under management

With this fee structure, which typically applies for ongoing portfolio management, the financial advisor charges you a fee based on the size of your overall portfolio. The fee is a percentage of the assets you have under management, with the usual rate ranging from 0.5% to 1.25%. Financial advisors usually charge a lower rate for investors with larger portfolios, so you get a discount for having more assets under management.

Hourly charges

If your financial advisor charges an hourly fee, you pay your advisor only for the time that they work for you. The financial advisor hourly rate can range from $100 to $400 per hour, and firms may require you to book at least two or three hours at a time. In general, the rate will depend on the services requested and the complexity of the situation.

When thinking about the return on investment for the financial advisor cost per hour, consider what you get for your money. Often, with hourly services the advisor will give you a blueprint so you can meet your goals, such as planning for retirement or saving for college. After the session, you can use that blueprint to execute the plan yourself rather than receiving ongoing assistance from the advisor.

Fixed fees

With a fixed fee financial advisor, you pay a one-time cost for their services. Flat fee financial advisors can charge anywhere from $1,500 to $7,500.

This fee arrangement tends to be a good option if you need help planning for a particular goal, such as saving your child’s college education or withdrawing funds to buy a second home, rather than ongoing assistance.

Commissions

With a commission-based system, the financial advisor earns a commission whenever a financial product is bought or a financial transaction is completed. A typical financial advisor commission is 3% to 6% of each transaction.

A commission structure is best for savvy investors who are knowledgeable about investing, as advisors have an incentive to sell you products. You’ll need to know when an investment is a good decision, and when an advisor is simply looking to make a sale.

Performance-based fees

Some financial advisors charge performance-based fees. These fees are charged when the portfolio outperforms a particular benchmark. The performance-based fee can range from 0.10% to 0.75%, on top of the advisor’s base fees.

Performance-based fees are controversial. Critics believe they could encourage advisors to take greater risks with investors’ money to increase their chances of earning higher fees. And, research has shown that performance-based fees do not improve overall investor return.

Financial advisor fee structure by service type

  • Portfolio management or investment advice: Portfolio management and investment advice are typically bundled together, often for an annual fee based on a percentage of assets under management. Portfolio management creates an investment strategy and asset allocation based on your financial goals and risk tolerance. Investment advice typically involves advising you on which types of accounts to open and what kinds of funds to select.
  • Ongoing financial planning: If you need holistic financial planning, such as estate planning, retirement planning or college savings planning, you may need regular check-ins with a financial advisor. For this service, you may pay a flat fee or retainer. In some instances, ongoing financial planning is included in the asset-based fee.
  • A one-time project or consulting: For one-time projects, such as a consultation for a major expense or the creation of a financial plan, financial advisors will typically charge an hourly rate or a fixed fee.

Is a financial advisor worth it? 4 questions to ask

Many people go without financial advisors and are completely self-directed when it comes to managing their money. If you’ve always handled your own money, you may be wondering, “Is a financial advisor worth it?”

Despite the fees that financial advisors charge, a good advisor can be well worth the added expense because of the value they provide. With their expertise and training, they can create a robust financial plan and develop a long-term investment strategy to help you achieve your financial goals. To decide if a financial advisor is a worthwhile investment for you, consider these four questions.

1. Is the advisor fee-only or fee-based?

Financial advisors are generally split into two categories: fee-only versus fee-based. A fee-only advisor is compensated only through the fees their clients pay, whether that’s an hourly rate, a flat fee or a percentage of assets under management. In other words, their compensation isn’t tied in any way to commissions.

Fee-based advisors, on the other hand, earn a mix of fees paid by their clients as well as commissions. Fee-based advisors have an incentive to sell you financial products since it boosts their own income, which creates potential conflicts of interest. Because of this, fee-only advisors are usually preferable.

2. How do the advisor’s fees compare?

Before selecting a financial advisor, it’s a good idea to shop around and do an investment fees comparison to find the right advisor for you and your budget.

Every registered financial advisor and investment firm is required to file a Form ADV with the U.S. Securities and Exchange Commission (SEC). The Form ADV outlines the firm’s services, disciplinary history and fees. The financial advisor should offer you a Form ADV, but if they do not, you can download it online yourself at adviserinfo.sec.gov. You can use the Form ADV from each advisor to compare fees against one another and the industry averages.

3. What will you get for the fee?

When reviewing each advisor’s fee, consider what’s included in the cost. Not all financial advisors offer the same services; some may provide more comprehensive services than others.

For example, some may offer asset management, but not financial planning. If a financial advisor offers both but at a higher cost, it may be worth the extra money to have an expert help you with your larger financial picture alongside your investment portfolio.

4. What added costs will I incur?

The advisor’s fee is only one investment fee you have to pay. There are other investment-related costs that can cut into your portfolio. These can include expense ratios, 12b-1 fees, sales loads, surrender fees and transaction fees.

If you’re not sure what the fees are, review the fund prospectus, and ask the financial advisor to review all potential costs with you.

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Separately Managed Accounts (SMA): What You Need to Know

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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As your assets grow, you may want more customization and control over your investments. If that’s the case, separately managed accounts (SMAs) may be a good solution for you. SMAs – portfolios of securities managed by an asset management firm and overseen by a professional money manager – are best for high net worth individuals. They’re uniquely designed for people with larger amounts of assets to address their personal preferences and financial goals.

If you’re thinking about opening an account, here’s what you need to know about the SMA investment structure.

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What is a separately managed account (SMA)?

An SMA is an investment vehicle composed of stocks, bonds and other individual securities that’s overseen by a professional money manager. Unlike some other investment options – like mutual funds – where your money is combined with that of other investors, you directly own the securities within an SMA. Because you own the securities, you have more control over your investments, and there are more options for customization.

Most investment managers work in teams to perform research to provide you with the best recommendations and investment advice, and you’ll get personalized attention to help you meet your financial goals. However, the ability to customize your investments and the added personal attention does come at a premium. SMAs tend to be for individuals with larger amounts of assets to invest, and typically require you to meet high minimum investment levels.

How separately managed accounts work

Ownership structure

Rather than owning shares in a fund that owns the individual portfolio securities – like you would with a mutual fund or exchange-traded fund (ETF) – SMAs work quite differently. With an SMA, the investor owns the individual securities within their portfolio.

Investment styles

Because you own the individual securities in your SMA investment, you have more control over your investments than you would with mutual funds or ETFs. You can set restrictions and establish preferences on how you want your money invested. For example, you can decide not to invest in certain companies or industries, or invest only in specific sectors. You and your portfolio manager will work together to create your SMA fund and to design your SMA model portfolio.

SMAs can include a wide variety of asset classes and strategies, including large-cap, mid-cap, small-cap, value and growth equities. You can also choose between fixed-income, balanced and domestic or international accounts.

Fees

While SMAs tend to have high investment minimums, separately managed account fees are typically low in comparison to other common investment vehicles. On average, the fee is 0.35% for SMAs, versus 0.68% for mutual funds and 0.20% for ETFs.

However, a financial professional’s fee is usually added to the management fee of the underlying investment. This investment fee averages 1% of the account’s assets, bringing your total costs closer to an average of 1.35%. Your rate can also vary depending on the underlying investments in your SMA.

Account minimums

While investment minimums can vary from company to company, you’ll generally need to have a substantial amount of money to invest in SMAs. Which firm is best for you depends on your desired portfolio manager, minimum net worth and available cash flow. Below are the account minimums for four major financial services firms that offer SMAs, as examples:

  • Charles Schwab: $100,000-$250,000
  • Fidelity: $100,000-$350,000
  • Morgan Stanley: $25,000+
  • TD Ameritrade: $250,000

Tax implications

Investing in an SMA can be helpful for investors who are worried about tax efficiency. When you invest in an SMA, you are only taxed on the gains in your specific portfolio. An SMA is made up of individual securities, so you can minimize capital gains by instructing your money manager to sell investments that will produce a capital loss through tax loss harvesting.

Benefits and disadvantages of separately managed accounts

Benefits

  • Flexibility: One of the core benefits of separately managed accounts is the flexibility it offers. An SMA is built specifically for your needs and investment goals. For example, you can decide to exclude certain industries or companies or focus your investments on environmental, social and governance (ESG) investments.
  • Tax efficiency: For individuals with a high net worth, one of the biggest advantages of professionally managed portfolios is the ability to harvest losses in the SMA portfolio to offset capital gains. By investing in an SMA, you can control and minimize the distribution of taxable gains.
  • Low fees: SMAs typically have relatively low fees. The average fee on an SMA is 0.35%. That’s lower than the average fee for a mutual fund, which is 0.68%. There may also be a management fee, however, which is typically 1% of the account’s assets.

Disadvantages

  • High investment minimum: One of the biggest managed portfolio disadvantages is the high investment minimum needed to open an account. Depending on the company you choose, you could need as much as $250,000 or even more to open an SMA. That’s a significant barrier for many investors.
  • Less regulatory oversight: While mutual funds and ETFs have significant oversight and report to regulatory authorities, SMAs have greater independence so that investors can have more control and a more personalized relationship with their portfolio managers.
  • Fewer options: Not as many companies offer SMAs than ETFs, mutual funds and other securities. Even if you have enough money to invest in an SMA, you won’t have as many options to choose from, so it can be more difficult to find a match for your needs.

Do I need a separately managed account?

SMAs are best if you are a high-earner or have significant assets and a substantial amount of money – for example, $100,000 or more – available to invest. Investing in an SMA makes sense if you want to take advantage of SMA investment tax efficiencies, and want the customization and personalization that managed accounts offer.

If you are new to investing or don’t have a significant amount of money that you are willing to tie up for years in the stock market, you’d be better off with another investment vehicle. Brokerage accounts or mutual funds, which have lower investment minimums, may be a wiser choice for you than an SMA fund.

How SMAs compare to other investment vehicles

Separately managed accounts vs. mutual funds

Mutual funds are a popular choice for investors. If you’re trying to decide between mutual funds versus separately managed accounts, it’s important to consider the differences between them.

With a mutual fund, your money is pooled together with money from other investors to buy securities like stocks and bonds. Instead of owning the individual securities, you own shares of the mutual fund.

Mutual funds are professionally managed and provide instant diversification. When you invest in a mutual fund, you invest in hundreds of stocks or bonds at once, which can help mitigate losses.

Mutual funds tend to be a good choice for beginner investors, as they usually have low investment minimums; you can often get started with as little as $1,000. But they have higher fees than SMAs, on average, cannot be customized and don’t offer the same tax advantages.

UMA vs. SMA

For individuals with a high net worth, an alternative to an SMA is a unified management account (UMA). When thinking about opening a UMA versus SMA, here’s what you need to know.

A UMA is a single account that combines multiple types of investments, such as mutual funds, ETFs, stocks and bonds, as opposed to just individual securities like an SMA. The account is overseen by a professional investment manager and can target several investing strategies, eliminating the need for multiple accounts.

Like SMAs, UMAs tend to have high investment minimums. However, they also usually have higher fees. The fee is typically 1.5% to 3% of the assets under management, though these rates generally already include additional investing costs, such as fund fees.

Separately managed accounts vs. brokerage accounts

If you want to invest on your own, you can open a brokerage account with an investment company or brokerage firm.

What’s the difference between a managed account versus brokerage account? SMAs are professionally managed, with a financial portfolio manager hand-selecting investments to meet your goals. With a brokerage account, you can choose your own investments, picking stocks, bonds, mutual funds, ETFs or index funds. If you are a novice investor or want a more hands-off approach, you can opt for a robo-advisor who will pick an asset allocation for you based on your investment goals and preferences.

Unlike SMAs, which have high account minimums, many brokerage accounts have $0 minimums, so you can start investing with very little money. Brokerage firms may have added fees and trade costs, so it’s a good idea to compare companies before opening an account.

What to consider when choosing an investment account manager

If you decide to open an SMA, choosing the right investment company and account manager plays a significant role in your investment’s returns. Before opening an account, make sure you complete the following steps to pick the right manager:

  • Check their credentials: Ensure that your portfolio manager is a registered investment advisor. Regulated by the U.S Securities and Exchange Commission (SEC), registered investment advisors are held to standards that require them to buy and sell investments solely based on their clients’ needs rather than their own interests. You can find out if an investment advisor is registered by using the FINRA BrokerCheck tool. You may also want to look for specific designations, such as the certified financial planner (CFP) or chartered financial analyst (CFA), which require a certain level of experience and study to obtain.
  • Ask about specialization: Before choosing an investment account manager, ask about their areas of specialization. For example, some portfolio managers specialize in international investments rather than domestic, or are particularly interested in volatile industries. You’ll want to find someone who can meet your specific needs.
  • Review Form ADV: Investment firms and financial advisors who are registered with the SEC are required to file Form ADV. This document outlines the services the firm offers, their fees and billing practices and any past disciplinary actions that have occurred due to professional misconduct. You can get a free copy at adviserinfo.sec.gov.

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IRA vs. 401(k): What’s the Difference?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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An IRA, or individual retirement account, is a self-managed account that anyone can open, while a 401(k) is only available through your employer if they offer one. The two types of retirement plans also have different contribution limits, investment options and associated costs.

It’s important to understand these differences to maximize your retirement savings, though you don’t necessarily have to choose one plan over the other — it can be a good idea to open one of each to reach your retirement goals.

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The difference between IRA and 401(k)

 Traditional IRA401(k)
Annual contribution limit$6,000 ($7,000 if you’re 50 or older)$19,500 ($26,000 if you’re 50 or older)
Investment optionsWide rangeLimited choices
CostsGenerally lowerMultiple fees
Employer match availableNoYes
Eligible for payroll deductionNoYes
Loans permittedNoYes

Eligibility

One major difference between an IRA versus a 401(k) is that anyone can open an IRA on their own. As long as you — or your spouse, if you file a joint tax return — have taxable compensation, you’re eligible for an IRA.

With a 401(k) plan, you’re only eligible if you’re employed and your company offers one. Otherwise, you can’t open an account or make contributions. If you leave the company or lose your job, you can no longer contribute to the 401(k).

Contribution limits

Compared with IRAs, 401(k) plans have much higher contribution limits. With an IRA, you can only contribute up to $6,000 per year. With a 401(k), you can contribute up to $19,500 per year.

If you’re 50 years or older, you can make catch-up contributions to help you save more for retirement that are above the regular contribution limits. With an IRA, the total annual contribution limit for people 50 and older is $7,000. With a 401(k), you can contribute an additional $6,500 on top of the $19,500 maximum contribution in 2020.

Costs

Your 401(k) plan will likely have administrative fees, investment-related expenses and distribution fees, while IRAs may have lower expenses. With a 401(k), you don’t have the luxury of shopping around; you only have the option your employer offers. But with an IRA, you can compare different brokers and choose a company that offers lower fees and transaction costs to save money.

Investment options

With a 401(k) account, you can only choose from a preselected list of investment options. Your options may include a mix of index funds and mutual funds.

IRA plans tend to have more investment choices, including mutual funds, exchange-traded funds (ETFs) and bonds.

Employer match

IRA accounts aren’t eligible for employer-matching contributions like 401(k) accounts.

With employer-matching contributions, your employer will match a portion of your 401(k) contributions, up to a percentage of your salary. For example, an employer might match 100% of your contributions, up to 3% of your salary. If you made $40,000 per year and contributed $1,200 to your 401(k) — 3% of your salary — your employer would match the entirety of your contribution, adding another $1,200 to your 401(k).

This is a significant perk that can effectively double your retirement contributions, and it’s an important part of your compensation package. Employer-match contributions aren’t subject to the same contribution limits that you have to follow, so the employer match can help you save even more for retirement. The combined maximum contribution limit for your contributions and your employer’s contributions is $57,000 or 100% of your salary, whichever is less, excluding catchup contributions.

Payroll deductions

Your 401(k) contributions can normally be deducted directly from your paycheck through payroll. But with an IRA, you’ll have to set up contributions on your own.

Tax deductions

With a 401(k), your contributions to your account are made with pretax dollars. Your investments can grow tax-deferred until you start taking distributions when you reach retirement age.

By contrast, your contributions to an IRA may be tax-deductible. If neither you or your spouse are covered by a retirement plan through your employer, you can deduct the total amount of your IRA contributions, as long as your modified adjusted gross income falls below a certain threshold. If you or your spouse are covered, you may be able to deduct just a portion of your contributions. Your modified adjusted gross income will also influence your deduction eligibility.

Loan availability

If you need money to pay for a home repair or other major expense, you typically can’t access the funds in your IRA before you reach age 59½ without incurring a 10% early withdrawal penalty. But with your 401(k), you have the option to take out a loan from your account. You can borrow up to 50% of your vested balance, up to a maximum of $50,000. Typically, a 401(k) loan must be repaid within five years, with interest.

Keep in mind that if you lose your job or quit, you might have to repay your loan, in full, right away. If you can’t repay your loan, you’ll enter into default, and you’ll owe taxes on the loan and a 10% early withdrawal penalty.

The similarities between IRA and 401(k)

Tax-advantaged

When people talk about setting aside money for the future, they often mention both 401(k) and IRA plans. That’s because both account types are tax-advantaged retirement savings accounts. For many, it’s a good idea to open one of each rather than depending on just one or the other to reach your retirement goals.

With a 401(k), your elective salary deferrals — how much of your paycheck you contribute to your 401(k) — are excluded from your taxable income, reducing your tax bill. You pay taxes on the contributions and earnings only when you start taking distributions from the account.

With a Traditional IRA — one of the types of IRAs available — you can deduct some of your contributions to your plan, also reducing your taxable income. But unlike 401(k) plans, how much you can deduct is dependent upon your income and whether or not your employer or your spouse’s employer offers a retirement plan.

Available as Roth accounts

When evaluating your options, keep in mind that there are Roth versions of both 401(k) and IRA accounts. With both a Roth IRA and a Roth 401(k), your contributions are made with after-tax dollars, and you can make tax-free withdrawals once you retire. This can be beneficial if you believe your tax rate is lower now than it will be when you retire.

Roth IRAs and Roth 401(k) plans have the same contribution limits as their respective non-Roth counterparts. While there are income restrictions on Roth IRA plans, Roth 401(k)s do not have income restrictions, meaning you can contribute up to the annual maximum regardless of how much money you make.

Hardship withdrawals offered

If you need money to cover a major expense, you can only take out a loan from a 401(k); an IRA doesn’t offer that option. However, if you’re experiencing a substantial financial hardship, both 401(k) and IRA plans offer hardship withdrawals.

You can take out a hardship withdrawal from your 401(k) if you have a serious and immediate financial need and can’t cover the expense with money from another source. You can only take out enough money to pay for the immediate need.

If you have an IRA, you can take out a hardship withdrawal in the following circumstances:

  • You have medical expenses that exceed 7.50% of your adjusted gross income
  • You’ve become totally and permanently disabled
  • You’re a military reservist called to active duty
  • You’re taking distributions after a qualified disaster

401(k) vs. IRA: Which should you choose?

If you’re still not sure whether you should open a 401(k) account or an IRA, here are a few common scenarios to consider in figuring out the best option for you:

  • If your employer offers a 401(k) plan and matches your contributions: If your employer will match your contributions, start with a 401(k) plan. Make sure you open an account and contribute enough to it to get the full match — that’s money you’d otherwise lose. If at all possible, also open an IRA and make contributions to that as well. If you can afford to do so, maxing out both accounts will help set you up for a secure retirement.
  • If your employer has a 401(k) but doesn’t match contributions: If your employer won’t match your contributions, start by opening an IRA or a Roth IRA account first since the IRA may have fewer fees and more investment options. Contribute up to the IRA’s annual maximum into the account. If you have money left over after maxing out the IRA, make contributions to your 401(k).
  • If you’re young and have a 401(k) account: In this case, consider opening a Roth IRA. You can lower your taxable income with your 401(k) contributions, and contribute to the Roth with after-tax dollars. Once you retire, you’ll be able to take withdrawals from your Roth IRA tax-free. When your income bracket is lower and you can qualify for a Roth IRA, it’s smart to take advantage.
  • If you’re self-employed: If you’re self-employed, another option is to open a SEP IRA. With a SEP IRA, you can contribute up to $57,000 per year. This article provides more information about SEP IRAs and how to open an account.

For most people, only saving in one retirement account won’t be enough to prepare you for the future. The annual contribution limits mean you won’t have enough money tucked away once you retire if you only save in one account. When possible, open up both a 401(k) and IRA account to maximize your savings and allow your nest egg to grow.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.