That information also isn’t easy to find. Hiring a financial advisor can be a bit like shopping for a mattress: very confusing. The terms seem different from store to store, and it’s hard to compare the products because you’re seeing only what’s on the outside.
In this article, I’ll explain the compensation models and types of financial advisors. I’ll also provide money expert Clark Howard’s recommendations on financial advisors.
Table of Contents
- How Much Does a Financial Advisor Cost?
- How Financial Advisors Get Paid
- Types of Financial Advisors
- Fee-Only Financial Advisors
- Commission-Only Financial Advisors
- Fee-Based Financial Advisors
- How To Find Out How Your Financial Advisor Gets Paid
- How To Choose Which Fee-Only Model Works for You
How Much Does a Financial Advisor Cost?
You’re interested in hiring a financial advisor. But how much will working with a financial advisor cost? And what will you get in return?
Those can be two of the most complicated questions in investing and financial management. The answers vary wildly based on the way that your financial advisor gets paid and what type of financial advisor you hire.
Once you narrow down those choices, there’s still a wide range of costs depending on which company or person you choose.
I’ll take you through those bigger choices and explain what Clark recommends.
How Financial Advisors Get Paid
In order to determine how much hiring a financial advisor will cost, you need to understand how they get paid.
There are three main business models for financial advisors:
- Fee only: As the name suggests, these financial advisors make money only by charging you fees. They never make money on commission or from third-party companies. Fee-only financial advisors are always fiduciaries.
- Commission only: Fiduciaries can’t be commission-only. So these are typically broker-dealers. Commission-only financial advisors make money on the products they sell you.
- Fee-based: This is the trickiest business model. Fee-based advisors can make money on fees and commissions. These can be fiduciaries or broker-dealers.
Clark wants you to focus solely on fee-only financial advisors.
“The time I want somebody to hire a commissioned salesperson to handle their investments is never, never, never — not ever,” Clark says.
You want a fiduciary financial advisor. That’s someone who is legally required to prioritize your financial interests ahead of their own.
Fee-only fiduciaries never earn commissions. However, fiduciaries can work as fee-based financial advisors. They’re required to, at minimum, disclose any potential conflicts of interest. So there’s still a way for them to earn commissions.
So in Clark’s view, it’s vital to work with a fee-only fiduciary rather than a fee-based fiduciary.
Types of Financial Advisors
I’ll go into more detail on each of the three ways that financial advisors get paid shortly.
But first, it’s important to know the differences between the three types of financial advisors:
1. Traditional Advisors
Historically, these are humans who meet with you face-to-face. Thought as you would expect, that has shifted more to virtual meetings during the COVID-19 pandemic.
Typical Financial Advisor Cost: The industry benchmark for traditional advisors is to charge an annual fee equal to about 1% of a client’s assets under management (AUM). That figure can vary considerably. If you’re paying a traditional advisor for a one-time consultation, you can expect to pay in the neighborhood of $200-$400 per hour.
What You Get: Traditional financial advisors tend to be full-service. That means they offer help with a host of financial needs including retirement planning, tax strategy, debt management, investing and estate planning.
You and your financial advisor will put in some initial work to pinpoint your goals and to create a financial plan designed to help you achieve them. The two of you probably will meet periodically to make sure you’re on track.
You can also reach out to your financial advisor for support if a major financial event occurs such as inheriting a large amount of money.
Clark.com Recommends: The best way to find a local fee-only fiduciary is through the Garrett Planning Network. Just enter your ZIP code to find financial advisors near you that are fee-only, charge by the hour and are accessible to almost everyone.
2. Hybrid Advisors
Many investment companies, including Vanguard, Schwab and Fidelity, now offer what I consider to be hybrid financial advisor options.
They combine robo-advisor investing with access to full-service financial planning.
Typical Financial Advisor Cost: There’s a wide range. But most hybrid advisors charge between 0.30% and 0.90% annually. The hybrids tend to be a little less expensive than traditional financial advisors due to the automated nature of the investment portfolios.
What You Get: The investment component for these hybrids usually starts with the company’s entry-level robo-advisor. You’ll answer a few questions and you’ll get a recommendation to invest in one of several pre-built portfolios based on your answers. In other words, the investment component is automated.
You’ll also get access to full-service human financial advisors. Especially at reputable investment companies, these are usually Certified Financial Planners who offer full-service financial planning and advice.
Clark.com Recommends: Clark loves Vanguard’s Personal Advisor Services and Schwab’s Intelligent Portfolios Premium. They’re two of his primary recommendations to people who are looking for a financial advisor.
If you’re not familiar with robo-advisors, the name serves as a pretty good description.
You’ll answer a series of questions. Then the robo-advisor algorithm will point you toward a pre-selected portfolio that fits your goals.
Typical Robo-Advisor Cost: Somewhere between 0.25% and 0.50% annually is a good range. With a typical robo-advisor, you’ll also pay somewhere close to 0.10% in expense ratios on the funds in which you invest.
What You Get: A well-diversified portfolio that often offers tax-loss harvesting and automated rebalancing. The portfolio mix is based on factors like your age, income and risk tolerance.
Some robo-advisors are starting to offer impressive tools to track your financial goals. But outside of investing, you won’t get other services such as full-service financial planning. Don’t expect access to human help beyond call center-level customer service.
Clark.com Recommends: Check out our list of the eight best robo-advisors.
Fee-Only Financial Advisors
As I mentioned earlier, Clark recommends that you do business only with fee-only advisors. These advisors are always fiduciaries, which is an important distinction.
Fee-only advisors get paid solely by charging clients. However, there are multiple ways that these advisors can bill clients:
- Based on assets under management (AUM). This is an annual fee based on the total dollars that you’re handing to the financial advisor to manage. The fee is typically based on the AUM at the beginning of each year and billed monthly or quarterly. Often the cost is tiered with multiple thresholds. The more money you give to your financial advisor to invest, the lower percentage you’re likely to pay as an annual fee.
- Hourly rate. You’d typically pay an hourly rate between $200 and $400 if you’re hiring a financial advisor for a one-time consultation.
- Service-based. A financial advisor can charge a set amount in exchange for a specific service. For example, perhaps you’d hire a financial advisor to create a retirement roadmap or to make an estate plan. This can be as little as a few hundred dollars or as much as thousands of dollars depending on the complexity of your needs.
Commission-Only Financial Advisors
Commission-only financial advisors often focus only on investing. They make money in three main ways:
- Front-end fees. Commission-only financial advisors often take a percentage of the money you’re investing before executing your investment order. They can also charge a flat fee in exchange for placing your order.
- Back-end fees. Some commission-only advisors charge their percentage or flat fee only after you’ve exited the specific investment they guided you to purchase.
- Third-party commissions. Advisors can get paid directly from the third-party company they’re recommending that you buy. Often this is in addition to the fee they charge you.
Fiduciaries can’t be commission-only, so we’re talking about broker-dealers here. Clark doesn’t recommend doing business with commission-only financial advisors.
For a long time, the investment industry’s self-regulator, the Financial Industry Regulatory Authority (FINRA,) only required broker-dealers to point clients toward “suitable” investments. The suitability standard allowed for plenty of leeway and made it possible for salespeople to point you toward products that paid them high commissions — even if those products weren’t in your best interests.
Recently, a new federal Securities and Exchange Commission (SEC) rule called Regulation Best Interest raised the bar from “suitable” to something that’s in the “best interest of the retail customer.” There’s ongoing legal discussion surrounding this rule. As of this writing, it remains unclear what stance President Joe Biden and his administration will take on the existing rule.
Fee-Based Financial Advisors
It’s easy to confuse fee-only and fee-based. But they’re quite different.
Fee-based financial advisors can get paid via fees and via commissions.
As long as they disclose any conflicts of interest, it’s legally possible for a fiduciary to earn commissions, but Clark recommends that you work with fee-only fiduciaries.
Fee-based advisors also may not be fiduciaries at all.
Because fee-based advisors can sometimes be difficult to identify, it’s important to understand not only how much your financial advisor costs you but how he or she gets paid.
How To Find Out How Your Financial Advisor Gets Paid
It would be useful if financial advisors had name tags on their shirts or banners on their websites identifying whether they’re fee-only, fee-based or commission-only.
Unfortunately, the language that financial advisors use to describe themselves and their qualifications doesn’t always tell you how they get paid.
But there are several ways you can find out:
1. Follow Clark’s Recommendations
As I’ve mentioned, Clark recommends Vanguard’s Personal Advisor Services, Schwab’s Intelligent Portfolios Premium. He also offers a third option: Use Garrett Planning Network to find a local fee-only fiduciary.
Clark’s recommendations all involve fee-only financial advisors.
2. Ask Questions
Don’t be shy when you interview a potential financial advisor. If you choose an option outside of the three that Clark recommends, be prepared to ask questions.
More specifically, ask the advisor these three things:
- How do you get paid?
- Do you earn commissions?
- What are the total costs for the services you provide?
If he or she can’t give you a direct answer, you should be skeptical.
3. Check the SEC Paperwork
All registered investment advisors (RIAs) are required to fill out what known as Form ADV. That’s SEC-required paperwork.
Potential customers are entitled to review an investment advisor’s Form ADV. In Section 5, financial advisors must check boxes to indicate the ways they get paid.
In Part II of Form ADV, financial advisors also must detail any compensation they receive outside of client fees.
You can search for an advisor’s Form ADV here.
How To Choose Which Fee-Only Model Works for You
How much will your financial advisor cost? That depends largely on the fee-only model you choose.
Accumulation Phase: No Advisor or a Robo-Advisor
When you’re in what’s considered the accumulation phase of your career, you may not need a financial advisor at all. If you’re 20+ years away from retirement, you can probably manage your own investment portfolio or outsource it to a robo-advisor.
If you handle your own investing, Clark thinks you should consider a target date fund or a mix of three low-cost index funds (total stock, international and bond). With this strategy, you should pay less than 0.20% annually in expense ratios.
As I mentioned, robo-advisors typically charge between 0.25% and 0.50%, plus about 0.10% in expense ratios.
Assets Under Management
I wrote about the reasons you may want to hire a financial advisor here.
If you need to hire a financial advisor for an ongoing relationship, expect to pay an annual fee of about 1% of the money your advisor manages for you.
If you prefer to invest on your own and just want to make sure you’re on the right track, it may be a great idea to consult with a financial advisor periodically.
You can also get a consultation for specific situations such as when you get married, when you have a baby or when you inherit a pile of money.
Expect to pay about $200 to $400 per hour for a consultation (but you won’t owe any ongoing fees).
If you want someone to create a full financial plan for you to follow or create an estate plan, a service-based fee model could work for you.
The price could range from a few hundred dollars to several thousand depending on your needs.
Figuring out how much the services of a financial advisor cost — and what you’re getting for that money — can give you a headache.
In order to figure out the cost, you’ll need to decide which type of financial advisor you need and what you’re hoping to accomplish.
Fortunately, Clark’s advice simplifies your choices. He recommends going with a fee-only fiduciary, preferably a Certified Financial Planner.