Financial advisors can provide a lot of value by helping you achieve your financial goals. Like any professional who’s knowledgeable in their field, advisors are paid for their services. There are a few different financial advisor fees that you might see on your account statements. Here’s how they work.
Types of Financial Advisor Fees Explained
Most financial advisors use a combination of five different fee structures. The most common financial advisor fees are:
- Assets Under Management (AUM) Fees: Advisors charge a percentage of the assets they manage on your behalf, usually ranging from 0.25% to 1.25% annually. Your exact percentage will likely depend on the advisor’s fees, your asset level, and how actively they manage your funds.
The AUM structure aligns the advisor’s interests with your own, as their compensation increases when your investments grow. This is perhaps the most common fee. - Commission-Based Fees: Advisors earn commissions on each trade they execute for you. The commission could be a flat amount or percentage of the trade’s value, and it’s usually fairly small on a per-trade basis.
Whether an AUM fee or commission-based fee is better depends on your asset level, and on how actively you invest. Many advisors offer both fee structures, and will recommend whichever is best for you. - Hourly Fees: Some advisors charge by the hour when consulting on specific projects or situations. These probably won’t be the bulk of your fees, but could be assessed if you need help evaluating a particularly complex opportunity. Hourly fees often run from $100 to $300 per hour, but can vary.
- Flat Fees: Some advisors offer set consulting services for a flat fee. These are typically more straightforward consultations, such as creating a long-term financial plan. A flat fee could be anywhere from a few hundred to several thousand, depending on the complexity of the matter at hand.
Whether you’d need to pay a separate fee for basic consulting services depends on the advisor, your relationship with the advisor, your asset level, and what other services you already use. - Performance-Based Fees: In select agreements, an additional performance-based fee may be charged for meeting or exceeding a specific metric. For example, this fee might be assessed only if the advisor outperforms a market benchmark.
Performance-based fees are less common than the others. They can align interest, however, and incentivize an advisor to do well managing your assets.
In addition to the financial advisor fees, you may also be responsible for custodial fees, brokerage fees, and other third-party fees. These depend largely on your investments. For instance, mutual funds have their own fees that everyone holding shares in the fund pays.
Concerned about potential financial advisor fees? Use our free financial advisor finder, to get matched with someone who’s well-suited for your needs (and within your budget).
Factors That Influence Advisor Fees
How much you ultimately pay an advisor will depend on many factors, not the least of which is the fee structure they use. Other factors that influence advisor fees include:
- Credentials: Highly experienced and credentialed advisors may command higher fees. Certified Financial Planners (CFPs) typically have higher fees than non-CFP advisors.
Depending on your asset level and situation, it may be well worth paying slightly more for more advanced expertise. - Services: Expect to pay more if you use more services, especially if some of the services require extensive expertise and/or research.
The services you need might change from one year to the next. For example, fees will probably be higher if you’re evaluating purchasing a business. - Asset Level: As your assets increase, you can expect an inverse relationship between total amount paid and percentage of assets paid. Although you’ll likely pay more in total, the rate you pay could be lower on a percentage basis.
AUM fees are directly proportional to your asset level, but some advisors offer lower AUM fees for larger portfolios. Other fees might increase because you have more complex matters, but flat fees will be a lower percent of a growing portfolio. - Investment Strategy: Active management strategies, which involve frequent trading, often incur higher fees than passive strategies that track market indexes. Talk with your investment advisor about which strategy is right for your goals and risk tolerance.
- Geographical Location: Fees can vary based on the cost of living and competition in your area. Online advisors might offer lower-priced services if you’re in a high cost of living area.
Understanding Fee Disclosure and Regulation
Regulations require financial advisors to clearly disclose how they are compensated. The main regulatory bodies, including the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA), mandate that advisors provide disclosures via Form ADV if they manage more than $25 million (many advisors do).
Form ADV contains two parts detailing information about an advisor’s firm. Consult Part I for basic information about its fees. Specifically, look at Section 5 where each fee type that a firm charges must be checked. Also consult Part II, where you’ll find more detail on fee rates, applicable asset level brackets, and any other compensation disclosed. You’ll find the exact fee calculations in this part, too.
You should be able to simply ask an advisor what their fees are, and whether they’re compensated via any other means. Most will explain their fees openly, and answer any questions you have — just be sure to ask many specific questions. You can confirm what they say with their ADV form, which clients and prospective clients are welcome to request.
The True Cost of a Financial Advisor
While fees are an important consideration, the true cost of a financial advisor must also account for the value they bring. There are the fees paid, and then there’s the opportunity cost that can come with not using an experienced and qualified advisor. If you don’t currently have an advisor, use our free advisor matching to get paired with someone who can help identify opportunities that match your goals.
Advisors may give you substantial value beyond their fees. Many clients think of this in the form of increased returns, but it also can come through consulting and guiding you on financial matters.
If an advisor saves you from a major mistake or knows of a more efficient way to execute something, that alone might more than outweigh their fees. Consider how much not using the right accounts for retirement could cost in additional taxes, for instance.
Can You Negotiate with a Financial Advisor?
Financial advisors understand that everyone’s financial situation is particular to them. This is why advisors provide personalized guidance, and many advisors are willing to accommodate clients who have particular needs (within consideration).
You can indeed negotiate with most financial advisors. You probably will have limited success asking for a single fee to be discounted, but there are some other strategies that might be effective:
- AUM Rate: If an advisor has tiered AUM rates, ask for the AUM rate of the next asset level above yours.
- Minimum Assets: Many advisors may be willing to waive a minimum asset requirement if your portfolio will likely grow.
- Bundled Services: Ask for a discount if hiring an advisor for multiple services, such as portfolio management, retirement planning, and estate planning.
- Additional Features: If purchasing a financial product through an advisor (e.g. an insurance policy), ask if there are any additional perks that can be added.
Don’t be afraid to ask for lower fees when first signing on with an advisor, and also periodically if your asset level is increasing.
Is a Financial Advisor Worth Your Investment?
Whether hiring a financial advisor is worthwhile for you depends on multiple factors. Consider your portfolio size, your financial literacy, and the complexity of your financial situation. If you lack the time, expertise, or discipline to manage your investments, an advisor can provide valuable guidance, potentially leading to better returns and a more secure financial future. See which financial advisor is right for you.
Finding the Right Fit: Choosing the Right Financial Advisor
Assuming a financial advisor is right for your situation, make sure you research several advisors to find the one that’ll best serve you. Ask about an advisor’s:
- Credentials: Look for advisors who are Certified Financial Planners (CFP), Certified Financial Advisors (CFA), or Chartered Financial Consultants (ChFC).
- Fiduciary: Make sure an advisor has a fiduciary duty to serve you, which is a legal requirement that they act in your best interest.
- Expertise: Ask whether an advisor has expertise and experience in the specific matters you need help with, whether that’s investment management, estate planning, or something else.
- Communication Style: Select an advisor with whom you feel comfortable communicating. This includes both how they send messages, and how they speak with you.
- Fee Structure: Choose a fee structure that you understand, and find fair for your needs.
To talk with an advisor who’s properly qualified, consult with one of the financial advisors in our Invested Better network. These advisors have worked with many clients on various matters, and will be happy to explain how they might help you achieve your financial goals.
