How Much Does a Financial Advisor Really Cost – The Full Truth
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.
Table of Contents
- How Much Does a Financial Advisor Really Cost – The Full Truth
- There’s Much More to This Than Just Fees and Commissions
- 3 Types of Financial Advisor Fee Structures
- How Much Does Each Type of Advisor Charge?
- The Fiduciary Standard and Financial Advisors Costs
- Where Financial Advisors Costs Get Complicated
- What Does Pillar Charge?
- The Full Truth about What Your Financial Advisor Costs
- The right way to think about this is, managing these costs is part of performance.
3 Types of Financial Advisor Fee Structures
How Much Fee-Only Financial Advisor Cost?
This type of financial advisor cost comes in three varieties – flat rate, hourly, and percentage.
The flat rate fee structure buys you a ‘moment-in-time’ financial plan. The financial 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 financial plan and asset under management, this approach can be appealing.
The problem with the flat fee structure approach is, all financial plans become obsolete and eventually fail, because the conditions of your life in which it was created do not remain constant. Without the financial advisor to help you keep it updated and accurate for your ever-changing life situation, its usefulness and effectiveness diminishes over time.
Hourly financial advisors operate more on a pay-as-you-go approach. The more complex your personal finance situation, the more it will cost you for the personal financial advice.
The percentage fee financial advisor or financial planner charges an ongoing fee, and this type of financial advisor works with your financial plan 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 under management 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…
How Much Fee-Based Financial Advisor Cost?
A fee-based financial advisor at first appears to be the same as a fee-only financial 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 financial advisor may charge a slightly lower percentage than a fee-only financial 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 financial advisors would on its own.
How Much Commission-Only Financial Advisor Cost?
Lastly, this type of financial advisors earn 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 financial advisors derive 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 financial plan or financial advice becoming less and less relevant and helpful over time for your personal finance.
Hourly fees can range anywhere from $100 to $400 per hour. It depends on the complexity of your personal finance situation, the experience of the financial advisors or financial planner and other factors.
Percentage fees hover around one percentage of your assets under management, per year. So if you entrust $3 million financial planning to your financial advisor or investment advisor, you may pay their advice fee for $30,000 per year (percentage of assets).
In the ideal situations, this predictable fee buys you customized, ongoing attention, continuous plan updates, rebalancing of your assets under management 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 our advice…
Your initial fees with a fee-based financial advisors 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 planners also earns financial advisor fees from commissions.
Their income is based on a baseline fee, and it increases from there. It’s similar to a mattress salesman who earns base fees, 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) financial 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 or financial planning 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 for their advice?
One reason is because they can claim to be ‘zero-fee’ advisors. This is accurate in the sense that they charge no percentage, flat, or hourly fee like a fee-only advisor does. But it’s inaccurate in the impression it gives, that their approach costs little or nothing when in fact it costs much more in most cases.
Important: Many financial advisors you encounter at big banks, option companies, investment firms, and brokerage houses operate on commissions and claim to be zero-fee advisors.
The Fiduciary Standard and Financial Advisors Costs
The best assurance you can get that your financial advisor works to minimize your financial plan costs is if they follow the fiduciary standard.
A 2015 report found that “savers receiving conflicted advice earn returns roughly one percentage point lower each year…we estimate the aggregate annual cost of conflicted advice is about $17 billion per 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 Advisors Costs Get Complicated
What if you need multiple financial services, like insurance, financial planning, 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!
Do your financial advisors offer help with situations like this?
If you’re paying hourly, they often do, but you’ll being paying for it every step of the way.
The same question applies to divorce, re-marriage, real estate investment plan, business plan, 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, and how much wealth they can drain from your investment portfolio per year.
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. Uncover 6 hidden costs of investment