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How Much Does a Financial Advisor Cost?

Andrea Coombes

September 16, 2022

It would be great if there were an easy answer to the question of how much a financial advisor will cost you, but hiring a money expert is not unlike buying a car: Your all-in costs are going to vary — a lot — depending on the type of car, the trim model, the add-ons. You get the idea.

Like car models, there are many types of financial advisors to choose from, and each type offers a varied lineup of services. On top of all that, financial advisors use different types of payment structures.

But it’s crucial to understand how your advisor gets paid — and how much. Consider this: If you invest $100,000 and pay a 1% annual fee over 20 years, that’s going to cost you almost $30,000 more than a 0.25% fee would have. Check out this SEC bulletin on investment fees.

Here are a few ways financial advisors get paid:

Assets under management

How it works: Many advisors charge a percentage of assets under management, or AUM. That percentage generally starts at about 1% per year. For example, say you have $1 million to invest. At 1%, that works out to $10,000 a year for the advisor.

Potential conflicts of interest: If AUM is the only fee your advisor is collecting — they’re not also collecting commissions on products they sell you — then AUM isn’t a bad way to go. One potential conflict is, if the assets are defined as invested money only, then the advisor might lean towards investing more of your assets, rather than, say, putting that money in a savings account. That won’t happen if your advisor is a fiduciary. (Some advisors define AUM as solely investable assets, while others will include cash or bank deposits. In the latter situation, this conflict won’t arise.)

Challenges: Advisors using an AUM fee model are less likely to work with small-dollar investors. Your $100,000 of investable assets may represent years of hard work to you — and you should be proud of it! — but to an advisor who charges based on AUM, that means an annual fee of $1,000, and they probably won’t be willing to take you on as a client.

If you have some money but not a boatload, and you’re looking to invest for a long-term goal like retirement, consider a robo-advisor. Generally, robo-advisors harness the idea that long-term investors do well with more or less the same mix of index mutual funds. Their automated investment portfolios differ only in how much risk they take on. With a robo-advisor, there’s often a low, or no, minimum account balance, and their AUM fees tend to be about 0.25% or even less.

Hourly fee

How it works: Some advisors charge an hourly fee, ranging from about $150 to $300 or more. This structure is an ideal way to reduce conflicts of interest, because the advisor is getting paid by you and only you (just confirm that this is indeed the only way the advisor is getting paid).

Potential conflicts of interest: If an hourly fee is the only fee your advisor is collecting — that is, they’re not also collecting commissions on products they sell to you — then this is about as conflict-free as you can get.

Challenges: The upfront cost may be too high for some people, and it might be hard to know exactly how much you’ll end up spending in total.

Fee-for-service

How it works: This payment model is similar to the hourly fee, but instead of paying for the advisor’s time, you pay for a specific service.

For example, say you’re feeling pretty good about your investment decisions, but just want to get a second set of eyes on your overall money sitch and goals for the future. All righty, then. A fee-for-service model, where you pay, say, $2,000 to $3,000 for a detailed financial plan, might work best for you. The fee will vary depending on the advisor and the service, but, like an hourly fee, this is a great way to feel safe knowing that the advisor is working solely for you — but, again, it’s important to confirm this is the only way the advisor is getting paid.

Potential conflicts of interest: If fee-for-service is the only way your advisor is getting paid, there’s a low risk of conflicts.

Challenges: The upfront cost will be too steep for some folks.

Retainer

How it works: This is a fee you pay once a year for ongoing access to a financial advisor. The precise terms of the arrangement — for example, exactly how often you get to be in contact with your money expert — will vary depending on the terms of the deal, but generally you’re paying a lump sum for almost unlimited access. That lump sum might be $7,000 or more.

Potential conflicts of interest: If the retainer is your advisor’s sole source of income in their dealings with you, there’s a low risk of conflict here.

Challenges: It’s a lovely thought to have almost-unlimited access to a financial advisor, but the upfront cost will be prohibitive for some folks.

Commission

How it works: With a fee-based, rather than fee-only, service, the financial advisor is likely to charge one of the fees described above as well as receiving a commission on product sales. For example, a financial advisor who sells insurance is likely to receive a commission for each policy sold — and that commission tends to be higher the more expensive the policy is (annuities, anyone?). Or, a broker will pitch you the mutual funds sold by his own firm, which may well be pricier than similar mutual funds sold by other companies.

Potential conflicts of interest: Commissions are inherently conflicted. The advisor in this situation may seem incredibly helpful and friendly, but he or she is a salesperson focused first on improving the company’s bottom line, not your own.

Challenges: Advisors who are paid commissions often appear to be more affordable than advisors who are paid solely by one of the other models described above. The challenge is to figure out exactly how much you’re paying in fees for the products they’re pitching, and to decide whether you really need that product in the first place.

Fee-only vs. fee-based

A hugely important question to ask a financial advisor before hiring them is: How are you paid? An advisor who is fee-only is paid solely by you. That’s a good thing. Compare/contrast with an advisor who is fee-based: They get paid by you as well as by companies that reward them for selling their products. If they’re not a fiduciary, they’re likely to sell you products that line their pockets rather than saving you money.

That’s why we recommend sticking with fee-only, fiduciary financial advisors.

Bottom line

If you’re not sure what payment model is best for you, focus on this phrase: fee-only fiduciary. If an advisor is paid solely through fees, rather than commissions, you can feel good knowing that you’ve done your utmost to avoid conflicted advice on what to do with your money. And a fiduciary is duty-bound to put your needs above their own. If you find a fee-only fiduciary that you want to work with, pat yourself on the back — and then, just to be sure, hit them with the script from our article on questions to ask an advisor.

If you’re not sure what payment model is best for you, focus on this phrase: fee-only fiduciary.

Next steps

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About the author

Andrea Coombes has 20+ years of experience helping people reach their financial goals. Her personal finance articles have appeared in the Wall Street Journal, USA Today, MarketWatch, Forbes, and other publications, and she's shared her expertise on CBS, NPR, “Marketplace,” and more. She’s been a financial coach and certified consumer credit counselor, and is working on becoming a Certified Financial Planner. She knows that owning pets isn’t necessarily the best financial decision; her dog and two cats would argue this point. Read more about Andrea.

About the editor

Carolyn Kimball is Managing Editor for Reink Media Group and the lead editor for content on investor.com. Carolyn has more than 20 years of writing and editing experience at major media outlets including NerdWallet, the Los Angeles Times and the San Jose Mercury News. She specializes in coverage of personal financial products and services, wielding her editing skills to clarify complex (some might say befuddling) topics to help consumers make informed decisions about their money. Read more about Carolyn.

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