How Much Does a Financial Advisor Really Cost?
There’s Much More to This Than Just Fees and Commissions
How much does a financial advisor cost?
The answer begins fairly simply with three basic fee structures. But as you’re about to see, the devil isn’t just in the details. To truly answer the cost question requires a much more thorough investigation than what you might be expecting.
Let’s begin with the simple part – fee structures.
3 Types of Financial Advisor Fee Structures
Fee-Only Financial Advisors
This type of advisor comes in three varieties – flat rate, hourly, and percentage.
The flat rate buys you a ‘moment-in-time’ financial plan. The advisor puts that plan in place, and leaves it to you to manage from that point on. If you’re the type of person who wants to stay in control over your finances and do it yourself, this approach can be appealing.
The problem with the
Hourly advisors operate more on a pay-as-you-go approach. The more complex your situation, the more it will cost you.
The percentage fee advisor charges an ongoing fee, and this type of advisor works with your finances continuously. They charge a fee based on a percentage of your assets under their management. Sometimes this fee steps down a bit if your assets surpass certain levels.
What you get for that fee is where the investigation mentioned at the top comes into play. More on that in a bit…
Fee-Based Financial Advisors
A fee-based advisor at first appears to be the same as a fee-only advisor. The difference arises from the commissions they may also earn when buying and selling certain investment products to you or on your behalf.
It’s fee-based because the fee is the starting point. The commissions they may earn get added on top of that.
A fee-based advisor may charge a slightly lower percentage than a fee-only advisor. If you encounter this, they can afford it because they make enough on commissions to make up the difference. Typically, commissions + fees will cost you more than the percentage fee of a fee-only advisor would on its own.
Commission-Only Financial Advisors
Lastly, this type of advisor earns all their income by selling products or investments on your behalf.
Commission-based products can include annuities, brokerage packages, mutual funds, and insurance. Because this type of advisor derives all their income from sales and transactions, they often make decisions in their own interests but that hopefully also work well for you. We’ll see how well they do at this in a bit.
How Much Does Each Type of Advisor Charge?
Flat-rate fees range from $1000 to $2000 for a one-time charge. As stated above, that gets you started with a ‘moment-in-time’ plan, and it becomes your responsibility to follow it from that point on. As your life situation changes, you’ll find that plan becoming less and less relevant and helpful over time.
Hourly fees can range anywhere from $100 to $400 per hour. It depends on the complexity of your situation, the experience of the advisor, and other factors.
Percentage fees hover around 1% of your assets under their management, per year. So if you entrust $3 million to your financial advisor, your fee would be $30,000.
In the ideal situations, this predictable fee buys you customized, ongoing attention, continuous plan updates, rebalancing of your asset allocation, and other personalized benefits.
Which deal is better? How do you decide? We’re not done yet! There’s a lot more to this question than just the simple fees. Keep reading…
Your initial fees with a fee-based advisor will look similar to those of the fee-only variety. They could be flat, hourly, or percentages. As stated earlier, they may be a little lower on occasion, because this advisor also earns income from commissions.
Their income is based on a baseline fee, and it increases from there. It’s similar to a mattress salesman who earns a base income, but has to earn commissions from actual sales to make a decent salary.
Typical commissions for the selling of investment products and packages range from 3-6% of the sale. That means, if your commission-based (or fee-based) advisor invests $500,000 of your assets in a particular mutual fund, they would net a $25,000 commission at a 5% rate.
As that example shows, it doesn’t take much for commissions to dwarf all the fee-only variations listed earlier.
Generally, it’s pretty difficult to justify the higher costs of commission-based financial advisors. Your investments would need to perform far above what your fee-only advisor achieves for you just to break even. The likelihood of that is exceedingly tiny.
So why does anyone go with commission-based advisors if they cost so much more?
One reason is because they can claim to be ‘zero-fee’ advisors. This is accurate in
Important: Many financial advisors you encounter at big banks, investment firms, and brokerage houses operate on commissions and claim to be zero-fee advisors.
The Fiduciary Standard and Financial Advisor Costs
The best assurance you can get that your financial advisor works to minimize your costs is if they follow the fiduciary standard.
A 2015 report found that “savers receiving conflicted advice earn returns roughly 1 percentage point lower each year…we estimate the aggregate annual cost of conflicted advice is about $17 billion each year.”
Did you catch that?
Not only do you pay for more non-fiduciary advice, but in most cases, your investments do worse too. You’re losing on both fronts.
Few commission-based advisors also act as fiduciaries (because living off commissions seldom aligns with your best interests). Thus, you shouldn’t expect your investments to perform better when managed by a commission-based advisor. Based on that report, you’ll do worse, and you’ll be paying 3-6% for the privilege.
Where Financial Advisor Costs Get Complicated
What if you need multiple financial services, like insurance, accounting, and estate planning?
If your advisor offers all these services in-house, you will likely pay more to access them. But if you need them, you need them.
What if you have complex financial decisions and aren’t sure of the best way to proceed?
For instance, when a spouse dies, transitioning back to single life (or marrying again) requires many complex financial shifts. Depending on your age when this happens, you might have to deal with IRAs, Social Security, pensions, life insurance, and all the taxes, fees, required minimums, and other factors that often incur costly consequences if you make the wrong choices.
For a really simple example, inheriting a Roth IRA has very different tax implications than a traditional IRA. Yet, so many people end up paying far higher taxes than they should even in this very simple scenario. Most people need help with their money, and would have more of it with a good advisor on their side!
Does your financial advisor offer help with situations like this?
If you’re paying hourly, they almost certainly do, but you’ll being paying for it every step of the way.
The same question applies to divorce, re-marriage, real estate sales and purchases, selling or starting up a business, medical debt, long term care – these and countless other real life questions are where most of the complexity lies when it comes to finances.
Does your financial advisor offer help with these?
What Does Pillar Charge?
Pillar Wealth Management is a fee-only financial advisor. We are a fiduciary, and we charge an all-inclusive fixed percentage. ‘All-inclusive’ means we do not charge extra fees for any of these situational financial questions as they arise. We just help you walk through them.
If we need to collaborate with your estate lawyer, accountant, insurance rep, or other specialists, we work with them too, again at no extra fee. All this gets included in the single percentage.
There is no simpler financial advisory cost structure possible.
The Full Truth about What Your Financial Advisor Costs
The entire preceding discussion has only touched on the fees you pay to your advisor directly.
The truth is, even with the commission-only advisor, you can end up paying much, much more for numerous other reasons in addition to their fees.
Here’s an investigation into six of these ‘hidden’ costs, [link to Blog 12] and how much wealth they can drain from your investment portfolio.
Understanding those other costs before choosing to work with an advisor may be the most financially astute decision you can make. Even the best fee-only advisor who earns the highest performance must be called into question over these costs.
The right way to think about this is, managing these costs is part of performance.
If your advisor is not minimizing these hidden costs (and others – it’s not an exhaustive list) – their investment gains and the growth they appear to have earned for you will add up to far less than what a different advisor will earn who is as fixated on minimizing your costs as he is on maximizing your performance.
You want the best of both worlds. Low cost. High performance. What’s at stake? Hundreds of thousands, perhaps millions of dollars in lifetime growth.