As with any relationship, the scope and depth of engaging with a financial advisor can vary significantly from one person to the next. One person may seek a financial advisor for education or one specific need when someone else desires to have more comprehensive assistance with managing multiple aspects of their finances.
To help you to decide if working with a financial advisor makes sense for you, this article has information about:
• Some key reasons people work with financial advisors
• How these advisors typically get paid
• Ways to determine if the services a particular advisor offers are the right fit for you
In general, financial advisors can help their clients to define their financial goals, prioritize them, and develop a plan to achieve them.
An advisor can also provide financially based education, which can help their clients identify whether they’re on track for achieving their goals. They can also help clients determine whether their habits are causing problems for their overall financial wellness.
Quality financial advisors can guide their clients through paying off debt, saving for the future, investing in a diversified portfolio, and aligning an investment approach with specific goals, timelines, and risk-tolerance levels.
What are the Typical Financial Advisor Fees?
When discussing financial advisor cost, it can be helpful to first look at the ways in which advisors can get paid.
When advisors are compensated on a commission basis, they receive pay based on the products they sell. The amount of commission paid can vary widely depending upon the product and the company.
Kiplinger.com notes that multiple arrangements can exist for advisors paid on commission, including receiving a percentage of a client’s assets before money is invested or being paid by the financial institution involved after a transaction takes place.
Or, the client might be charged each time that stocks are bought or sold.
The article cited above notes that, sometimes, this financial advisor may also sell life insurance, disability insurance, annuities, and so forth. And, if a client wants those products, then it can streamline the process to have one advisor handle multiple offerings.
On the downside, an advisor paid on commission may be “incentivized to churn accounts to generate additional commission, and there is potential for conflicts of interest when it comes to directing clients toward higher-commission products.”
Note that commission-paid advisors are held to what’s called a suitability standard . This means that recommendations they make to you must be suited to your financial needs, goals, and circumstances.
And while they are not held to the higher fiduciary standard they have an ethical and legal obligation to put their client’s interest ahead of their own), they are required to follow certain standards under FINRA Rule 2090 – The KYC Rule. This rule requires reasonable diligence on the part of the advisor to understand each customer and act on their behalf.
When an advisory fee is charged by the advisor, the general charge for the client is a percentage of the assets they manage. According to U.S. News & World Report , the average financial advisor fee, annually, is 1% of the assets being managed.
It’s reasonable to expect that an advisor can explain the reasoning behind the fee being charged, given a client’s specific circumstances—and if it’s higher than expected, it’s also reasonable to ask what added value the client is receiving.
Perhaps, for example, the advisor also helps with tax planning, or estate planning. They may be investigating a client’s financial vulnerabilities or otherwise going beyond standard money management services.
Actively managed portfolios may come with a higher fee because the advisor may charge more for putting more effort into getting the best value for their client.
Advisors using any fee-based model have a fiduciary responsibility to their clients, which is the higher standard.
With an advisory fee-based model, the more assets the client has to be managed, the more the advisor makes—which can be an incentive for your advisor to work harder for you. Under this model, there isn’t a readily seen benefit for advisors to steer clients to products with higher commissions because the advisor doesn’t get paid that way.
With this type of fee, the advisor would charge an upfront fee, or a subscription-based one, to provide either a financial plan or ongoing advice. Prices vary, but on average, a financial advisor will charge between $1,000 and $2,000 for developing a comprehensive financial plan.
WealthManagement.com cites a report by Cerulli Associates that revealed that although asset-based fees are still the primary method (58%) of charging clients, the number of advisors who are going to a fixed planning fee for the actual financial planning they do is increasing.
Approximately 36% of advisors surveyed charge a fixed planning fee for financial planning, the article continues, with 62% of millennial-aged advisors charging these fees.
So, as a potential client considers financial advisors, they may find themselves talking to someone who charges a fixed planning fee to create an initial plan and then uses a different fee structure to actually manage the portfolio. What’s most important is to be clear about what will be charged, and how.
For clarity on how a particular advisor charges for services, a client can review the appropriate Form ADV , provided by the SEC where, among other things, the advisor must provide information about how they charge clients.
In this case, the financial advisor charges a straight hourly fee for their services. On the one hand, having an advisor charge an annual fee means that a client may not need to worry as much that their advisor is recommending products because of the income the advisor would earn off of that recommendation.
Choosing a financial advisor that charges per hour can be costly, though, especially if more investigation needs to be done to find a product that fits a client’s needs. This may or may not be a huge concern, but if resources are limited these fees can potentially be hefty.
Factors to Consider with Financial Advisors
As clients make their decision about whether to use a financial advisor or not—and, if so, which one will offer what they want and need—here are some items they could consider:
• What type of help is needed from an advisor? Education? Coaching? Management?
• What services can the financial advisors provide?
• How well does this match up with your specific needs?
• How does the advisor charge? In other words, how does your advisor get paid?
• What context can be provided about fees? How does a percentage translate into real dollars, both today and in the future?
Active Versus Automated Investing
The term “active investing,” typically means investing with a consistent, hands-on approach—whether done by the individual investor or a portfolio manager.
With this method, a portfolio is actively managed, with the goal of outperforming the stock market’s current average returns. (At SoFi, you can be an active investor and still pay $0 in SoFi transaction fees, each and every time you trade!)
Automated investing takes a hands-off or “passive” approach, which seeks to maximize returns by minimizing costs associated with buying and selling. SoFi also offers automated investing, where a portfolio is automatically built and managed based on specific investment goals, then diversified and rebalanced, all without charging a SoFi management fee.
Not sure which is right for you? Take our quiz to see what type of investor you are so that you can invest in a way that dovetails with the way you think.
Using SoFi Invest
As you explore your options, you could consider leveraging SoFi’s complimentary financial planners. Our financial planning team is here to provide SoFi members objective education and advice when it comes to personal finances. SoFi members can learn more and schedule a one-on-one conversation with a SoFi financial planner here.
At SoFi, you can invest in multiple ways. SoFi offers both active and automated investment options through SoFi Invest®. And no matter which way you choose to invest, SoFi can help you grow with you and your goals, no matter your knowledge level at the start.
As far as fees, you pay zero in SoFi fees: $0 in transaction fees and $0 in management fees.
Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“SoFi Securities”).