Many investors who aren’t comfortable with a “do it yourself” approach to investing decide that they’re better off working with a professional financial advisor.
How much does a financial advisor cost? This depends on several different factors, starting with the advisor’s fee structure. Some financial advisors may charge annual flat fees, hourly fees, a fee for a plan, sales commissions, or a fee based on account size or assets under management (AUM).
A financial advisor’s fee also depends on the type of advisor you work with. There are several different types of financial advisors including traditional face-to-face human advisors, online advisors, and so-called robo-advisors.
What is the Average Advisor Fee?
The average fee assessed by traditional in-person human advisors who charge by assets under management (AUM) is 1% of AUM.
For online advisors who charge by AUM, the average fee is between 0.30% and 0.89% of AUM.
For robo-advisors who charge by AUM, the average fee is between 0.25% and 0.50% of AUM.
Other average fees include the following:
Flat fee/retainer: Between $2,000 and $7,500 annually
Creating a financial plan: Between $1,000 and $3,000
Hourly fee: Between $200 and $400 per hour
Commission/load: Between 3% and 6% of the investment amount
Other Considerations Affecting Advisor Fees
Since online and robo-advisors typically charge up to half as much as traditional human advisors, it’s important to understand what you do (and don’t) get from each type of advisor. That way, you can decide if the extra cost is worth it for your personal finances.
A traditional human advisor is what most people think of when it comes to a financial advisor. In most instances, you will meet with your advisor face-to-face in his or her office or via telephone or videoconference. In addition to investment advice, these advisors may also offer other services such as tax guidance, estate planning, and comprehensive financial planning. The percentage of AUM charged usually goes down once AUM hits certain benchmarks, such as $250,000, $500,000 or $1 million.
Robo-advisors are relatively new. These are computer-based financial advisors that use algorithms to construct and manage investment portfolios based on your investing goals, time horizon, and level of risk tolerance. There are usually very low (or even no) account minimums with robo-advisors, which can make them a good choice for beginner investors. However, they usually don’t offer personalized advice or comprehensive financial planning.
Online financial advisors are often a hybrid between traditional human advisors and robo-advisors. Like robo-advisors, they operate online or via telephone or video, but they function similarly to human advisors. For example, they may offer full-service, personalized financial planning and investment advice. Some online financial advisors offer direct access to a dedicated CERTIFIED FINANCIAL PLANNER (CFP®).
Types of Human Advisors
Breaking things down further, there are three types of traditional human advisors, each of whom charges fees differently.
This advisor is compensated only by commissions (or loads) earned on investment products they recommend. This can sometimes lead to conflicts of interest if an advisor is tempted to recommend a high-commission product that might not be in a client’s best interest.
This advisor can use any of the different fee structures (or a combination of fee structures) described here except commission. A fee-only advisor is a fiduciary, which means they are legally obligated to make decisions that are in your best interest. This offers the greatest protection against potential conflicts of interest.
This advisor is a hybrid between commission-only and fee-only advisors. They may use a fee structure and also be compensated by commissions earned on investment products they recommend.
How to Determine Advisor Fees
It’s important to determine how a financial advisor charges for services before hiring them. The best way to find out is to ask the advisor for a clear, concise explanation of their fee structure.
If an advisor doesn’t want to answer the question or answers in a confusing or contradictory way, I don’t think you should hire this advisor. To make the best financial decision, it would be helpful to understand your advisor’s fees and payment structure.
The National Association of Personal Financial Advisors (NAPFA) offers a search tool that can help you find a fee-only financial advisor. Other helpful resources include the Financial Planning Association and the Garrett Planning Network.
Is Hiring a Financial Advisor Worth It?
There are pros and cons to hiring a financial advisor to help you with your finances. Only you can decide what will be worth it for your personal situation.
Save time managing your investments or researching strategies
Get help prioritizing your financial goals
Access personalized expert advice
Optimize your income
Have an accountability partner
Streamline or simplify a complex financial situation
Potential conflict of interest or biased advice
Sharing personal information
Working with a Personal Capital Advisor
Since inception, Personal Capital has acted as a fiduciary to give clients the best possible financial advice for their situation. As a Registered Investment Advisor, Personal Capital’s team of advisors not only follows the fiduciary standard but embraces it as part of the mission to provide financial advice.
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Author is not a client of Personal Capital Advisors Corporation and is compensated as a freelance writer.
The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. Compensation not to exceed $500. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.