Arguably the most popular question in the financial advice world is “how much does a financial advisor cost”? The pricing structure for most other types of services – be it mechanics, attorneys, or accountants – is relatively straightforward. Unfortunately, this has not always been so in the finance and investment industry.
As the financial industry has evolved, so too has the manner in which consumers pay for financial advice. Generally speaking the way you pay a financial advisor for their services will be one of the following:
- Commissions only (i.e. buying and selling financial products such as stocks, funds, life insurance, or annuities),
- Advisory Fees (i.e. a percentage of assets under management, or flat or hourly financial planning fees – which is referred to as being fee-only), or
- Some combination of commissions and fees (which is referred to as being fee-based)
You know you have to pay for the advice one way or another, so why does it matter? In a nutshell, how your advisor is compensated can show you where their incentives are – are they motivated to sell you something (commissions), or are they motivated to grow your account and/or spend time creating a financial plan (asset based or financial planning fees). To be clear – there are good and bad advisors on both ends of the spectrum. The point is, you should be sure to understand how your financial advisor gets paid before working with him or her.
What are financial advisor commissions, and generally how much do these advisors charge?
Commission-based advisors can mostly be found at large Wall Street firms, banks, and insurance agencies. As the name implies, they are compensated for initiating transactions with consumers. In the old days these types of professionals were referred to as “brokers”, but now they are generally called financial advisors, wealth advisors, financial consultants, so on and so forth.
Many commission-based advisors are licensed to sell a cornucopia of products such as stocks, bonds, mutual funds, life insurance, and annuities. However, they often stand to make a higher commission if they sell one product over another. Life insurance and annuities are typically the most lucrative – on average, according to finance site The Balance, commissions on variable and fixed index annuities can range from 4%-8%. 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.
While commission-based advisors often help clients with comprehensive financial plans, some focus more on your investment portfolio because buying and selling products is how they are paid. This can create a conflict of interest. Consumers should therefore be vigilant as to whether such an advisor’s recommendation is truly in their best interest, or whether the advisor is attempting to fit a square peg into a round hole – or in other words, justifying a high-commission product as the right course of action even if more practical (or cheaper) alternatives are available.
Of course, this is an extreme example and usually not the case in real life; advisors under a commission model are capable of providing honest, transparent advice. The point is that these are important questions to keep in mind.
What is a fee-only advisor, and generally how much does this type of financial advisor cost?
Fee-only advisors are usually found at independent companies known as Registered Investment Advisory firms (RIAs).
The term “fee-only advisor” can mean many different things: some charge flat hourly fees for their advice (similar to a lawyer), while others charge flat retainer fees (prices will vary based on your personal situation & financial complexity, but expect to at least pay a few thousand dollars per year), or – most commonly – a percentage fee charged on the money they manage for you (called an asset-based or asset management fee). Asset management fees will 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!).
Fee advisors are regulated by the Securities and Exchange Commission (‘SEC’), which holds its advisors to a “fiduciary” standard, meaning they operate under a legal obligation to work in their clients’ best interests at all times. Perhaps unsurprisingly, higher-cost products usually does not make the cut when put under this level of scrutiny.
As opposed to commissions, where incentives are at worst hidden or at best just downright confusing, fee-only structures tend to be more transparent. This is because the fee is typically agreed upon at the start of the client-advisor relationship and is visible to the client on their monthly/quarterly statements. Compare this to commissions, which are typically charged on an ad-hoc, per-transaction basis (and might not show up on a statement).
Again, the most popular method for fee-only advisors tends to be the percentage of assets under management fee. Generally speaking this type of arrangement can put clients and advisors on the same side of the table, because the advisors’ compensation will rise and fall as does your account balance. Commissions, on the other hand, are oftentimes paid upfront so any gains or losses past that point generally won’t affect how much that advisor gets paid. Note, however, asset management fees are not necessarily free of conflicts of interest because the advisory fee will be higher the more of your assets they have 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, you should know fee-only and fee-based are not the same thing.
Fee-based advisors can be paid via commissions and asset management fees (or hourly planning fees, etc.). A common scenario is an advisor who charges a percentage fee on the assets they manage for you, and at the same time he or she also has an insurance license and can sell insurance policies or annuities if need be. For example, this type of advisor could charge a 1% annual fee to manage your portfolio, and also earn a commission off selling you a life insurance policy.
Fee-only advisors generally don’t have the proper licenses to sell insurance. If one of their clients ends up needing insurance, the fee-only advisor may simply refer them to a third-party insurance company.
The takeaway from this post is that there is no universal answer on how much a financial advisor costs. It will depend on the type and which firm you choose. Some will charge commissions, some will charge only advisory fees, while others may charge both. There are plenty of good and bad financial advisors out there on all sides of the compensation spectrum. The point is, no two advisors are the same – either in how they are compensated, the services they provide, or in their general approach to financial management. Choosing the right investment advisor is not a decision to be made lightly. Considering how many options consumers have when it comes to getting financial advice, it is important to do some 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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