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How Financial Advisors Charge for Their Services
The SEC defines six common ways financial advisors charge for their services:
- A percentage of assets under management
- Fixed fees
- Performance-based fees
- Hourly charges
- Commission-based fees
- Subscription fees
The first four types are the most common. Percentage of assets under management is by far the most common fee structure however - being offered in over 95% of all registered financial advisor firms in the US. If you have a strong preference toward one type of fee structure, most advisor firms will offer one or more types of compensation. In terms of actual costs, what you ultimately pay will likely come down to what services you are looking for and how many assets you need to have managed. You should expect to pay the following for each type of payment structure:
|A percentage of assets under management||0.25 to 0.5% for Robo-Advisors, 1% to 2% for firms|
|Fixed Fees/Retainer||$1,000 to $3,000|
|Hourly charges||$100 to $500|
Percentage of Assets Under Management: 1 to 2%
When you are looking for portfolio management or investment advice, the most common way to pay for services is as a percentage of your assets under management. The more you have to manage, the more you have to pay. It is unlikely that you will ever have to pay a fixed fee or retainer just for portfolio or investment management unless you have an account balance below the advisor’s minimum for managing accounts. Of the 13,000 advisor firms in the US, only 325 offer a fixed fee without also offering a percentage of assets under management,
Fixed Fees Cost: $2,000 to $7,500/year or $100 to $300 per hour
Fixed fees are usually offered for financial planning services rather than portfolio management. If for example you wanted to create a financial plan to get ready for retirement or you had a financial situation and needed assistance, a fixed fee would be the most likely way you would be charged.
Fixed fees can generally be charged on an hourly or annual retainer basis. If you have a unique, one time financial situation and need consultation, you may be charged an hourly rate with your financial advisor. If you are looking to create a long term plan with a CFP® or other financial planner, then you will likely be charged an annual retainer.
Performance Based Fees Cost: A percentage of your investment profits
The third most common form of financial advisor fees are performance-based. As the name implies, these are the fees that you pay if your advisor does a superb job and earns you profits on your investments. The exact cost of a performance-fee will need to be decided between you and your advisor, but they are generally a percentage of the profits.
It is important to note that in the vast majority of cases, performance-based fees will be tacked onto a percentage you already pay based on your assets under management. According to SEC data, out of nearly 13,000 advisor firms in the US, only 154 offer performance-based fees but do not offer a fee structure based on total assets under management.
How Much Do Robo-Advisors Cost?
Robo-advisors have rapidly grown in popularity in just the past five years. In fact, 3 of the top 10 largest financial advisors are now robo-advisors. The appeal of robo-advisors likely stems from their reduced cost relative to human advisors. Robo-advisor fees are generally less than 0.5% of your assets under management which is upwards of 2 to 3x less than you would get with a human advisor.
That being said, a robo-advisor may not be for everyone. If your goal is simply to have a place to invest your money every so often and entrust a robo-advisors algorithms to let it grow passively over time - then a robo-advisor may be for you. If you are looking for something more hands on - such a financial planner to actually walk you through a financial plan for your future - then a human advisor is your best bet.
|Fee Structure||Cost||Cost with $100k AUM|
How to Determine How Much Your Financial Advisor Costs?
The best way to see how your advisor firm charges clients is to look at their Form ADV on the SEC.gov website. Every advisor firm in the country has their information listed for public consumption on the SEC website. Specifically in section 5, question E of the Form ADV, you will be able to see how your potential advisory firm charges clients.
To see how much your advisor charges, you will need to dig into their Part 2 Brochure, which can also be found on the SEC website. The Part 2 Brochure can be quite a bit dense however. The most effective way of ascertaining your financial advisor’s cost is simply by asking them. Before committing any finances to an advisor, you should have them run through their pricing in explicit detail. Understand all potential costs before making your decision to invest time and money with them.
Fee-Only Advisor vs Fee-Based Advisor vs Commission-Based Advisor
You may come across these three terms when searching for a financial advisor, and understanding each will be important in determining how your prospective advisor collects fees. The most ideal type of advisor is going to be a fee-only advisor. These advisors are the ones least likely to have a conflict of interest. They do not collect any money based on things they may sell to you. They are only collecting fees from the amount of assets you have under management or from fixed fees. Fee-only advisors are always fiduciaries, which means they have your best interest in mind.
Fee-based advisors are similar to fee-only advisors, except they can also earn money from commissions; however, they are always fiduciaries. Commission-based advisors can only earn money from commission they make by selling you financial products, but they do not necessarily have to be a fiduciary. We advise customers to be wary of commission-based advisors and to always make sure they are a registered fiduciary. If they are not a fiduciary, they may sell you products against your best interest only because they will earn a commission from the sale.