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Updated on Thursday, July 9, 2020
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
- Types of financial advisor fees
- Financial advisor fee structure by service type
- Is a financial advisor worth it? 4 questions to ask
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.
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 Type||Average Rate|
|Percentage of assets under management||0.50% to 1.25%|
|Hourly charges||$100 to $400 an hour|
|Fixed fees||$1,500 to $7,500|
|Commissions||3% to 6%|
|Performance-based fees||0.10% 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.
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.
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.
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.
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.
The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.