Taking a leap into the investing world can seem daunting, and sometimes a potential investor might want a little help figuring out the best solutions for their needs. Enter the financial advisor. But how much is that going to cost?
There is no single, straightforward answer, because the average fee for a professional advisor varies, often because of their degree of professional experience and the amount of assets they’re managing for each of their clients.
In general, though, the traditional fee for a financial advisor is 1% of the portfolio value. Although that may or may not be what an investor would end up paying if they invest, at least it’s a good starting point.
Are financial advisors worth the cost? To help answer that question, read on to find out about what financial advisor fees cover, typical ways a financial advisor gets paid, strategies to consider to pay less, and more information. In addition, learn about robo advising and that technology-based form of investing.
Average Cost of a Financial Advisor
The average financial advisor cost in 2019 was 0.95% of the portfolio assets being managed, overall, but the amount is slightly higher—1.02% of the assets being managed—for accounts having a million dollars in assets.
Robo advising (also called automated investing) is generally a lower-cost option, with fees typically ranging between 0.25% and 0.30% of portfolio assets.
Because this is significantly less than what the average financial advisor might charge, this may be an attractive option for new investors with smaller amounts of money to invest.
What Financial Advisor Fees Cover
Typically, when someone pays their financial advisor, it covers the cost of the initial creation of a financial plan and an investment portfolio designed to help the investor meet financial goals.
Going forward, the fee typically covers asset management and updating of the plan, perhaps annually. Some firms may offer additional services, such as tax planning, while others charge an extra fee for their add-on services.
What does it mean, though, to have someone manage investment assets? Legally speaking, an investment advisor is something called a fiduciary.
Essentially, when making decisions, they must put the interests of the client first, above their own, and the advisor must disclose any conflicts of interest.
Typically, this person offers financial advice and manages the client portfolio. Note that different advisors may offer a different mix of services, so it’s important for investors to understand what is being provided to them, and the advisor should be able to clearly articulate what services are being included in their fees.
Looking for a Wealth Management Advisor?
High earners wanting to build up assets to more quickly build wealth may be looking for this type of financial advisor.
A wealth management advisor designs customized solutions, which includes investing in assets in ways to enhance a client’s net worth, shifting investment vehicles when risk levels get too high.
What “too high” means varies from investor to investor, so a wealth management advisor would typically discuss how that’s defined for a particular client and then manage those assets accordingly.
In wealth management, this often includes all of a person’s assets, including real estate, retirement accounts, and more.
This could include, as just one example, an advisor collaborating with an attorney to help a client set up a trust for their children. As another example, some wealth advisors will help investors to build a rental real estate portfolio.
Although the name “wealth management” may imply that these services are only for people who are already affluent, the reality is that some wealth advisors offer advice and provide services at reasonable costs.
How Advisors Get Paid
Not all financial advisors get paid in the same way. They may, for example, get paid:
• on a commission basis that they earn by the financial products they sell or the financial transactions they make
• a flat fee for the services they offer
• an hourly rate for services rendered
Still others charge:
• on the assets under management (AUM) model where they receive a percentage of assets being managed
• through a combination of these models
For some professionals, financial planning is at the heart of what they do—for others, providing advice may be ancillary to their core business, which is making the buy-sell transactions.
Fee-Based Advisor Versus a Fee-Only Advisor
When using a fee-only advisor, investors don’t have to worry that the advisor is focused on selling them a product because it’ll give the advisor a nice commission. That’s because a fee-only advisor only earns money through fees paid to them by clients.
How those fees are calculated may vary—for example, an advisor could charge the traditional 1% on the portfolio value.
A fee-based advisor, meanwhile, could charge a flat fee, a performance fee, or an hourly fee—and may also charge money in other ways. These could include brokerage commissions, insurance commissions, and more.
Although a fee-based scenario may be more clear cut than other payment models, it doesn’t necessarily mean that these advisors are less expensive.
Fees charged can be wide-ranging so, besides finding out how a particular advisor wants to be paid, it’s also important to know how much that will be.
And, here’s one more consideration: Some fee-based advisors will only work with clients who have a certain amount of assets, which can exclude investors with smaller portfolios.
What to Consider
It’s important that:
• Investors are clear about what they’re paying for.
• They’re receiving results in a way that makes the fees being paid worthwhile.
• Investors feel as though they’re getting the best deal for their needs.
Unsure whether good value is being provided? Looking for ways to reduce the fees being paid? Here are a couple of strategies to consider.
Ways to (Possibly!) Pay Less
Sometimes, a newer advisor will charge lower fees as they are building up a client list. This person won’t have as much experience but may be willing to negotiate fees—and may have a good amount of time to dedicate to a client’s portfolio.
Another strategy is to talk to a more established financial advisor and ask if there are ways to lower their fees. Depending upon the advisor, they might, for example, charge an investor less if they’re willing to use fewer of the available services.
Or, if a client has more assets than the advisor usually manages, then they might be willing to negotiate fees.
More About Reducing Investment Fees
As another strategy, there are online investors, an option that typically costs less than a full-service investment firm would. These brokers might use a more self-directed approach, offering investment choices that can include individual stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other options.
Commissions vary with online brokers so, once again, it makes sense to be clear about what’s being charged and what services this will include.
Note that, although transaction costs will probably be lower than with full-service brokers, these costs can still add up. That’s because you may pay a fee for each of the shares you’re trading, or based upon the value of them.
In addition, online brokers may have a minimum requirement to start a portfolio. So, if you’re interested in this option, it may make sense to investigate what a particular broker’s requirements are. Online brokers may provide videos to educate their investors but typically don’t offer many planning services or support beyond that.
Role of Risk Tolerance
No matter which investment strategy you use, it’s crucial to understand personal risk tolerance. This is how comfortable a person feels with varying degrees of risk, and there is a SoFi quiz that can help investors understand their own personal risk tolerances. Overall, a person can think about:
• How much money they could afford to lose without it having a negative impact on overall financial security
• Financial goals and how aggressive an investment strategy would need to be to reach those goals during the desired timeline
• Emotional responses to risk taking
This is true when someone uses a financial advisor and also when using a robo advisor, also called an automated advisor.
Insights Into Robo Advising
A robo advisor is an algorithm-based software application that provides investment recommendations based upon the information provided.
This information includes an overview of investment goals and what kind of timeline is desirable to reach them; with a shorter timeline, the recommendations made will likely be more aggressive than with a longer one.
Recommendations made from an automated advisor also take current market conditions into account, as well as an investor’s personal risk tolerance.
Robo advising technology is relatively new, first emerging in 2006. Within a couple years, more sophisticated versions were released and its popularity grew.
One benefit of using automated advisors is the minimum account size required, which is typically much lower than a financial advisor might require. This can be ideal for investors who are just starting out and need to incrementally build up their account.
Other people who might appreciate robo advising include those who don’t want to fuss with the details of investing, with those details including but not limited to rebalancing portfolios.
This might not be the ideal option for people who want customized, full-service investment options. Plus, robo advising may not be the right choice for people who want to talk to someone when the market is fluctuating significantly, for example, or when a new investment opportunity presents itself.
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