Determining how much a financial advisor is going to cost before you actually choose one is an important step in your research for a trusted advisor. You want a clear picture of not only the types of services you’ll receive, but the fees associated with each service. Luckily, if you’re wondering how much financial advisors charge, there are usually only a few different advisory fee structures you’ll need to evaluate.
Find out what type of fees you may encounter when working with a financial professional and how to consider the level of service you’ll receive as part of the equation.
How much personal financial advisors make depends on the way they charge for their services. There are several different options you may come across in your search for an advisor. An advisor may charge fees using a single structure, or may present you with a based on the type of financial planning services you need. A hybrid fee structure could be a blend of any of the common single fee structures.
It’s important to ask upfront about all the fees and expenses you may incur when working with any particular financial professional. Keep in mind that the advisor’s fee generally will not include trading expenses, commissions or fund expense ratios. That means you also need to find out about your financial advisor’s investment and wealth management philosophy. If they’re excessive with trades, for instance, or focus on certain types of expensive investments, then you could end up spending a lot more money regardless of the advisor’s fee.
Here are the four most common types of fees and what to consider when working with an advisor.
A common method among financial advisors (including Dowling & Yahnke Wealth Advisors) is to charge an asset-based management fee. Also referred to as assets under management (or AUM), you’ll usually pay a percentage of your account balance each year or quarter. Some advisors charge one flat percentage or fixed fee dollar amount regardless of your account balance.
D&Y offers a blended fee so that as your balance grows, the overall rate declines rather than continuing to be charged at the same percentage.
This way you’re actually rewarded with a lower fee structure over time as your investment portfolio builds. For some firms like D&Y, this is the only advisory fee you’ll be charged for your financial advisor’s services. You’ll usually see this structure advertised as “fee-only” advisors.
Some advisors charge a project fee or flat fee based on a specific service they’ll provide. This “fee-for-service ” financial advice may be a one-time charge or an ongoing fixed fee depending on what you need. In some cases, this structure helps younger clients gain access to financial advice even if they don’t necessarily have enough assets to qualify for an advisor who requires a minimum AUM.
A standardized flat fee is often seen for a single service, such as a one time planning fee. This may indicate a standard delivery and may not be as customized to all your investment needs. Instead, you’ll be charged a set amount of money in exchange for a set type of services or products. Every client receives the same price and service (or deliverable).
A project fee typically offers more flexibility if you are looking for targeted advice. You’ll receive a quote upfront based either on the time or the value of the advice. Oftentimes, both flat fees and project fees are used when a client has just a few questions or has a specific life event they want to work through with an advisor. You usually don’t get a comprehensive financial plan in either case; instead, the scope entails a much smaller scope of advice for a specific financial situation.
So how much is a financial advisor by the hour? It may seem like an attractive offer since you only pay for the time spent on your account. Similar to a flat based fee, it’s an option that may help individual investors who have smaller accounts gain access to financial advisory services.
You do need to look carefully if considering a financial advisor who charges an hourly rate. Typically, this only applies for helping you craft a financial plan or consulting services. It’s generally not used for actually managing any assets. In some cases, an advisor may still charge an hourly rate on top of an AUM fee for additional services or projects.
If you do wonder how much does a financial advisor cost at a specific firm, make sure you clearly understand all the types of fee structures they have and what services are actually included in the amount you’re charged.
When charged a retainer fee, you pay a fixed amount in exchange for a set amount of time with the advisor each quarter or year. If you have a retainer agreement with your financial advisor, you may have open access to how frequently you can reach out with questions or concerns regarding any financial situation.
A variation of this fee structure is a subscription fee. This usually has a more formal structure of meetings scheduled between you and the advisor. There’s less flexibility with access, but you still get ongoing checkpoints to manage your finances. It usually makes more sense for clients with lower account balances and with less complex finances. Plus, you don’t have to worry about fluctuating fees that are attached to investment portfolio performance. Assuming the level of service is appropriate for your needs, a retainer fee does offer more financial planning compared to a flat fee or project fee.
On the flip side, just like those other models, retainer fees are often used in conjunction with AUM fees to account for both the financial planning advice and the day-to-day management of funds.
As you can see, fee structures can vary greatly, so a financial advisor can make money in several different ways.
Most financial advisors of all experience levels make a base salary, which is then augmented by company bonuses. The bonus amount is usually based on the amount of revenue brought in to the financial advisory firm. Experienced advisors who have reached partner status also typically receive profit distributions.
In addition to the fees charged by the financial advisory firm, some firms may also make money via commissions from referrals to other financial service professionals or for adding certain products to your portfolio. If this is the case, they should disclose the referral arrangement and not advertise as a fee only advisor.
When you work with a financial advisor who is not considered fee-only, there’s a much greater potential for a conflict of interest. For example, is your advisor recommending a financial product because it’s the best fit for your needs or because they might earn a commission from the sale? While the recommendation may be suitable, the incentive to the adviser to also earn and extra commission creates a conflict of interest which must be disclosed. Transparency is extremely important before you even choose your advisor. By knowing the different fee structures and potential revenue streams for an advisor, you can ask very specific questions about how they plan to earn money from your portfolio.
Price and fee structure are vital to understand when determining how to find a financial advisor you can trust. We saw earlier that different cost structures come with different types and levels of services. While a one-time fee may seem like a cost-savings in the long run, it may not actually include everything you need from a financial advisor to achieve the investment experience and financial success you are after.
That’s why we encourage you to evaluate the level of service as well as price. Ask both yourself and your advisor, “Do I get what I’m paying for?” It’s not just about the dollar amount you’re paying, but what you’re actually receiving back in terms of value.
D&Y, for instance, provides comprehensive wealth management services to meet our clients ongoing needs throughout their lifetime. Beyond developing and implementing tax-efficient, low-cost and well diversified investment plans, D&Y provides clients with ongoing financial planning advice and timely execution of recommended planning strategies.
The types of additional service you receive from your advisor should be incorporated into any decision you make when evaluating the cost of an advisor. So before you choose, think carefully about what kind of help and advice you need to make sure you are stewarding and protecting your wealth in the best way possible.
If you’re wondering, “How much does it cost to hire a financial advisor?” then it’s important to know that the answer depends on several factors. Make sure you understand the scope of services a financial advisor may provide and the value they could bring to you. Don’t be afraid to ask questions of a potential advisor to get a truly robust understanding of their fee structure and services. It may not be as straightforward as you thought.
Looking for a fee-only advisor in San Diego that includes a full suite of services? Contact Dowling & Yahnke Wealth Advisors today.