A financial advisor provides financial advice or guidance to customers for compensation. This includes a number of services such as investment management, tax planning, and estate planning. Because there are various ways financial advisors can charge for their services, new clients are often perplexed by how much they should expect to pay. Here we explain the five most common ways financial advisors charge for their services.
- Financial advisors charge fees for providing their clients with guidance on a number of services such as investment management, estate planning, and retirement planning.
- Commission-based advisors receive fees when their clients purchase financial products that the advisor recommends.
- Some financial advisors charge by the hour or by the project for their services.
- Financial advisors whose fees are based on assets under management (AUM) will charge a percentage based on the client's net assets they manage.
- Fee-only financial advisors do not accept commissions for products sold; instead, they charge by the hour, by the project, by assets under management, or some combination of these.
Assets Under Management (AUM) Fees
Financial advisors who charge based on an assets under management (AUM) fee structure will charge their clients a percentage based on the total dollar amount of the assets they manage. This percentage is usually 1% to 2% of a client's net assets. For a typical 1% rate on a million-dollar portfolio, financial advisors take home $10,000 per year in fees. However, the more assets clients have, the lower the percentage they pay for advisory services.
Hiring an AUM financial advisor is usually the most expensive route for clients. However, the benefit for clients is that this fee structure gives advisors an incentive to not take huge risks or ones they would not take with their own money. Since advisors receive a percentage of the clients' assets, they have an interest in managing their clients' portfolios very well.
Financial advisors who are commission-based receive a fee or compensation based on product sales. They receive fees when their clients make a specific financial transaction that they recommend, such as purchasing a stock or other asset.
For some commission-based advisors, providing financial planning services or advice to their clients may be secondary to selling financial products. A common criticism of commission-based advisors is that they have a conflict of interest that leads them to recommend financial products that may not always be in the best interests of their clients.
Advisors can also charge clients per hour rather than commissions or a certain percentage of assets under management. It all depends on the type of advisory services a client needs. The usual hourly rate for financial advisors ranges from $150 to $400 per hour.
Rates can vary depending on the experience of the advisor and if the advisor has a highly valued area of expertise. The total fee could range from $2,000 to $5,000 on various projects, such as generating an estate plan for a client.
Financial advisors who charge a flat fee will frequently provide their clients with a list of services and the fees they charge per service. Self-directed investors tend to pay advisors flat fees or go with hourly rate payment plans. They often only seek suggestions from advisors or the option to use complicated asset allocation models.
Another set of investors may want advisors to take control of their portfolios and make all the decisions for them. These investors tend to have less of an understanding of financial matters. Flat fees range from $1,000 to $2,000 for an advisor to look over a client's portfolio and make simple suggestions.
Fee-only financial advisors do not accept commissions or compensation based on product sales. Fee-only advisors can structure their fees in a variety of other ways. They can charge by the hour, by project, by assets under management, or some combination of these. Because their income does not come from selling financial products, fee-only advisors are often seen as being less biased and more focused on giving clients personalized advice based on the client's financial goals and best interests.
The Bottom Line
A good rule of thumb for investors to consider when reviewing the fee structures of various financial advisors is to first consider exactly what you'll want your advisor to do for you and the amount of involvement you expect to have in the process.
If you have a simple project in mind—such as getting advice on portfolio management as you get closer to retirement—you might be fine with hiring a financial advisor on an hourly or flat fee basis. On the other hand, if you require comprehensive wealth management services and hope to establish a long-term relationship with a financial advisor, you might consider an AUM or fee-only arrangement.