One of the most popular questions in the financial world is “how much does a financial advisor cost”? The internet has made it way easier for consumers to compare prices for pretty much any service. Unfortunately, this is not always the case when it comes to getting financial advice.
As the financial industry has evolved, so has the way you pay for these services. How you pay a financial advisor will usually be one of the following:
- Commissions only. For example, selling financial products like stocks, funds, life insurance, or annuities.
- An annual fee. For example, a percentage fee on your account, or a flat/hourly fee to create a financial plan (“fee-only“).
- A combination of commissions and fees (“fee-based”)
There’s no such thing as a free lunch: an advisor gets paid one way or another. So why does any of this matter? How you pay an advisor can reveal incentives. Are they motivated to sell you something (i.e. earning commissions)? Are they motivated to grow your investment account, or to help you map out a financial game plan (i.e. an asset-based or financial planning fee)?
To be clear – there are good and bad advisors on both ends of the spectrum. The point is, you need to understand how your financial advisor gets paid before working with him or her.
What are financial advisor commissions, and how much do these advisors generally charge?
Commission-based advisors are everywhere, for example Wall Street firms, banks, and insurance agencies. As the name implies, they get paid for initiating transactions. They used to go by “brokers” or “agent”, but nowadays they have may different titles.
Most commission-based advisors sell a cornucopia of financial products. For example, stocks, bonds, mutual funds, life insurance, and annuities. Yet they often stand to make a higher commission if they sell one product over another. Life insurance and annuities are particularly lucrative – commissions can range from 4%-8% on average. For example, a commission-based advisor might stand to make between $4,000 to $8,000 for selling you a $100,000 annuity. It is probably not a coincidence that the more expensive/higher commission products also tend to be the most complex and confusing.
Commission-based advisors can help you make a financial plan, but they tend to focus on your investments because that is how they get paid. This can create a conflict of interest, like trying to fit a square peg into a round hole. In other words, selling a high-commission product in place of a more practical option. Ask yourself whether their recommendation is really in your best interest.
Advisors under a commission model are, of course, capable of providing honest, transparent advice. The point is to keep these questions in mind and be on guard.
What is a fee-only advisor, and how much does this type of financial advisor generally cost?
Fee-only advisors are usually associated with companies called “Registered Investment Advisory” firms (RIAs). RIAs are usually smaller, independent companies not affiliated with one of the big Wall Street brands. Some RIAs might be a one-advisor shop, while others can have dozens or hundreds of advisors on staff.
The term “fee-only advisor” can mean many different thing. Some charge flat hourly fees for their advice (like a lawyer). Others charge a flat retainer fee, based on your personal situation. The most common type of fee is a percentage fee on an account they manage (called an asset-based or asset management fee). Asset management fees vary based on the size of your portfolio, but on average they tend to be around 1% per year, give or take (not every advisor charges the same asset management fee, so be sure to ask!).
The Securities and Exchange Commission (‘SEC’) regulates RIAs and fee-only advisors and holds them to a “fiduciary” standard. A fiduciary is a fancy way of saying they must always act in the client’s best interest. Perhaps unsurprisingly, higher-cost products usually do not make the cut when put under this level of scrutiny.
Fee-only structures tend to be more transparent. The fee is typically agreed upon at the start of the client-advisor relationship, and should show up on monthly statements. On the other hand, commissions are generally charged on an ad-hoc, per-transaction basis, and might not even show up on a statement. At worst, commissions might be purposefully hiding. At best, they are downright confusing.
The most popular price for fee-only advisors tends to be the percentage-of-assets fee. Generally speaking this type of arrangement can put clients and advisors on the same side of the table, because the advisors’ compensation rises and falls along with your account balance. Commissions, on the other hand, are oftentimes paid upfront so any gains or losses past that point won’t affect how much the advisor gets paid. Note, however, asset management fees are not 100% conflicts of interest free because the advisor stands to make more by having more of your assets under their management.
What is a fee-based advisor, and generally how much does this type of financial advisor cost?
What’s the difference between a fee-only and a fee-based advisor? As if the financial world didn’t already have enough jargon, fee-only and fee-based are not the same thing.
Fee-based advisors can be paid commissions and asset management fees (or hourly planning fees, etc.). A common scenario is an advisor who charges asset management fees, and who also has an insurance license. This advisor could charge a 1% annual fee to manage investments, and also get paid commissions for selling life insurance or annuities.
Fee-only advisors generally don’t have the licenses required to sell insurance. In this case they might refer you to an independent, third-party company if you need insurance.
The takeaway is that there is no universal answer on how much a financial advisor costs. It will depend on the type you choose. Some will charge commissions, some will charge only advisory fees, while others may charge both. There are good and bad financial advisors on all sides of the compensation spectrum. Choosing the right advisor is not a decision to take lightly. Consider how many options consumers have when it comes to getting financial advice. It is important to do research and ask plenty of questions before signing the dotted line!
Taylor Hoffman is a proud member of the fee-only advisory community.
Visit the FAQ page to learn more about our asset management fees (#s 5, 6, and 8).
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