Financial Advisor Fees and Costs Go Far Beyond What the Advisor Quotes You
How much do financial advisors cost? If you like simple answers to complex questions because you don’t want to know the real truth, you can stop reading right now. Because we’re about to pull back the curtain on what financial advisors charge. For those with $5+ million in liquid investable assets you can download an in-depth guide here.
Table of Contents
Table of Contents
The way you know there’s more to the story is that some advisors will claim to charge no fees. Any thinking person knows that can’t be true, because no one works for free.
The truth is,there seems to be a simple answer to the question of how much financial advisors cost, which you can find all over the internet. It’s flat fees, percentages, and commissions.
But then, there’s the full answer. The financial advisor’s percentage fees and flat fees represent that simple answer. So we’ll start there too. But before you go, make sure you read to the end to find out all the other ways financial advisors have found to charge you money.
In our signature written work, 7 Secrets to High Net Worth Investment Management, Estate, Tax and Financial Planning, you’ll discover eight separate costs your advisor could be charging you. Only one of them is the fee they quote you. Normally sold for $599, you can get this ultimate guide to high net worth investment management for free. Click here to get your free copy.
Let’s begin with the simple part – fee or compensation structures.
3 Types of Financial Advisor Fee Structures
Fee-Only Financial Advisors
This type of financial advisor’s fee structure comes in three varieties – flat fee, hourly, and percentage.
The flat fee buys you a ‘moment-in-time’ financial plan. The financial advisor puts that investments 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 flat fee approach can be appealing.
The problem with the flat fee 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 services to help you keep your financial plan updated at least per year and accurate for your ever-changing life situation, its usefulness and effectiveness diminish over time.
Hourly financial advisors operate more on a pay-as-you-go approach. The more complex your personal finance reviews, 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 management in your account balance per year. Sometimes this advisor fee steps down a bit if your assets surpass certain levels.
What kind of advisory services 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
Fee-based advisors at first appear to be the same as a fee-only advisor. The difference arises from the fees they may be able to earn when buying and selling certain investment products to you or on your behalf.
It is called based on the fee because the fee is the starting point. The fees they may earn get added on top of that. Fee-based advisors may charge a slightly lower percentage than fee-only financial advisors. If you encounter this, financial advisors 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 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 content can include annuities, brokerage packages, mutual funds, and insurance. Because this type of financial advisor derives all their money from sales and transactions, they often make financial planning services in their own interests but that hopefully also works 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 becoming less and less relevant and helpful over time to your financial goals.
Hourly fees can range anywhere from $100 to $400 per hour. It depends on the complexity of your situation, the experience of the financial advisor, and other factors. Percentage fees hover around 1% of your assets under management, per year. So if you entrust $1 million to your investment advisor, your fee would be $10,000. In addition, you could get percentage fees around 0.25 -0.5 % when using Robo advisors investing services. A Robo advisor could be your helper if you need simple investment management advice with low financial advisor fees. On the other side, you can also get a combination of Robo advisor and investment advisors advice if provided.
In ideal situations, this predictable financial advisor’s fee buys you customized, ongoing attention, continuous plan updates, rebalancing of your asset allocation, maintaining a good credit score for your credit cards, and other personalized benefits to achieving your financial goals.
By using this type of compensation structure, this can be said create a “great user experience”.
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 financial advisor fees with a fee-based advisor will look similar to those of the fee-only advisor fees variety. They could be hourly, percentages, or a flat fee. As stated earlier, they may be a little lower on occasion, because this financial 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, per year.
As that example shows, it doesn’t take much for commissions to dwarf all the fee-only variations listed earlier.
So why does anyone go with commission-based advisors if they cost so much more?
One reason is that 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, investment advisor firms, and brokerage houses operate on commissions and claim to be zero-fee advisors.
Pillar Wealth Management, LLC., wrote the book on the best investment management strategies for investors with high net worth. Even better, the author and founder with over 60+ years of experience want to work directly with you. Get the undivided attention, focus, advice, and proven expertise you deserve!
The Fiduciary Standard and Financial Advisor Fees
The best assurance you can get that your financial advisor works to minimize your fees is if they follow the fiduciary standard. A 2015 report found that “savers receiving conflicted advice earn returns roughly 1% lower per 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 financial advice, but in most cases, your investments do worse too. As investors, 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 planning services, like insurance, accounting, and estate planning? If your advisor offers all these services in-house, you may 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 individual retirement accounts (IRAs), Social Security, pensions, life insurance, and all the taxes, fees, required minimums on account balance, 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 investment advisory services with their money, and would have more of it with a good investment 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 be 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 personal finance.
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 compensation structure possible.
The Full Truth about What Your Financial Advisor Costs
The entire preceding discussion has only touched on the financial advisor costs you pay to your financial advisor directly. The truth is, even with the commission-only advisor, the “price tag” that you may pay will be 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 money these financial planners can drain from your investment portfolio. Understanding those other costs before choosing to hire a financial 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 financial advisor fees.
The right way to think about this is, managing these costs is part of the performance. If your financial 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 financial 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.
Start Your Financial Planning with a Certified Financial Planner (CFP)
A certified financial planner is a money management professional who assists any types of clients to achieve their financial goals. Financial planners offer financial advice and services to clients like personal finance reviews, such as risk consideration, work or life phase, etc. Thus, a certified financial planner can determine a suitable content of investment management for its clients. Based on that, financial planners can provide decent financial planning by allocating the client’s savings into several kinds of investments in order to gain other income. Financial planners have expertise in investment management services like risk management, asset allocation, tax planning, retirement planning, and estate planning.
It is significant to know how much you are going to get charged before utilizing the services from a financial advisor. According to the Wall Street Journal, understanding the advisor’s fee structure is crucial to know which one suits your current financial circumstances. Besides, you also have to choose an advisor with a fiduciary standard which is commonly proposed by advisors with a fee-only structure.