What is the average cost of a financial advisor? There is a simple four-part answer to this question.
- A registered or certified financial advisor will usually charge you an annual fee of around 1% of the value of your assets under management.
- Some financial advisors work on an hourly basis, charging between $200 to $400 per hour.
- A robo-adviser can actively manage your portfolio and will charge an annual fee of between 0.25% and 0.50% of the value of your assets under management.
- A registered or certified financial advisor will typically charge a one-time fee of $1,000 to $3,000 to develop a financial plan for you.
It starts with a plan
Well, it should, but here is an important point.
Many, financial advisors draw a distinction between financial planning and investment management. That often means financial advisors will charge different rates for planning and investment management. That also means with some services you can opt to have a financial plan developed by someone in person, and then your investments managed on an ongoing basis automatically by a robo-advisor.
Assuming that you don’t already have a plan, you will need to hire a financial planner to develop a plan. How much a certified financial planner charges you for a financial plan will depend on the complexity of your finances. Elements of complexity would include:
- Whether you have an employer-matching 401k,
- Any other investments you already have,
- If you have real estate that you rent out as a source of income,
- If you have or expect to receive an inheritance,
- If you have other sources of income,
- If you want advice on insurance, college costs, other major purchases, or estate planning.
Investment management is more of an ongoing process while financial planning tends to be a one-time activity that is revised periodically.
Most financial planners will recommend that you do an annual review to check whether the plan is on track or whether any adjustment is needed.
Commissions and fees
It is important to know how your financial planning is being compensated. Some financial planners receive commissions on products they sell you. That can mean they are incentivized to sell you products where they receive the highest commissions. Those products may not be the best for your needs.
Always find out how your financial advisor is being compensated. If it isn’t clear, ask questions.
Fiduciary and what it means
A registered financial advisor will have a legal and ethical obligation to act in your best interests. This is the meaning of fiduciary. They will be obligated to put your interests ahead of their own. They will have to provide services that are best suited to you and not necessarily those where they have the biggest profit margins.
If you are getting financial advice from a broker they will not be bound by fiduciary rules if they are not registered, financial advisors. Many brokers are not registered financial advisors and many brokerage companies will not allow their employees to become registered as financial advisors.
Brokers and dealers who may offer you advice on financial investments are bound by rules of suitability. They are only required to make sure any recommendations they make to you are suitable for you. This is a much lower and lesser standard than the fiduciary standard, where the advice has to be in your best interests.
If a broker recommends an investment to you, the requirement that it is suitable for you really just means that you can afford it. The broker may receive a higher commission from the transaction than if they sell you a different financial product that may actually be more suitable for you.
In the US the fiduciary responsibilities of registered financial advisors are defined in the Investment Advisors Act of 1940 and in the US the suitability obligations that govern all others who work in the financial services industry are defined by the Financial Industry Regulatory Authority.
Certification and registration
In the US there are different organizations that certify or register financial advisors. I am using the terminology somewhat interchangeably here.
Some of the designations are Certified Financial Planner, or CFP, Chartered Financial Consultant, or ChFC, Registered Investment Advisor, or RIA.
So … If you are looking for a financial advisor
If you are looking for a financial advisor to develop a plan and then implement that plan for you, you will want a registered or certified financial advisor. You will want to see in writing that they are bound by fiduciary responsibilities towards advising you and managing your investments as defined in the Investment Advisors Act of 1940. The more you will be putting yourself and your finances in their hands the more important this point is.
Smart Asset is an advisory service that only works with certified financial advisors.
The posh end
At one end of the scale, you will be looking for a local registered financial advisor that you can meet face to face. This doesn’t necessarily mean you will be paying an arm and a leg, as explained above much will depend on the complexity of your financial situation. In today’s world though it is possible to take a more a la carte or hybrid approach.
You can also get human financial advice with maybe the initial contact being in person but then subsequent interactions can be online using video chat or by phone. There are advisory services like Personal Capital or Betterment that operate in this way and this helps keep their costs and the fees you pay down.
Robo-advisers are investment management software applications set up to actively manage your investments according to investment goals that you define.
Most investment management firms that use robo-advisers to manage client funds will build your portfolio using a limited number of stock, fixed-interest, and other exchange-traded funds, or ETFs with distinct risk-reward characteristics.
The robo-adviser will be programmed to manage the mixture of funds and cash in your portfolio according to your financial objectives and economic conditions. What this means in practical terms is that the robo-advisers will be rebalancing the holdings in your portfolio to maintain the desired risk to reward characteristics.
Some robo-advisers, like Personal Capital, specialize in socially responsible investing.
Get out of debt first
If you are struggling to get out of debt, then you need a different kind of financial advice.
Questions and answers
Q. Does it make sense to pay for financial advice?
A. The honest fact is that most of us could do with impartial expert financial advice. If you are feeling financially lost, then the chances are that you should seek financial advice. Good financial advice should pay for itself within a few years either through improved performance on your investments or helping you avoid costly mistakes.
Q. Do I need financial advice or should I do it myself?
A. If you are asking that question the chances are that you do need professional financial advice. If you’re in a situation where you have financial decisions and directions to take and you are not sure which way to go, then taking professional financial advice is a good idea.
Q. When is the best time to seek financial advice?
A. If you don’t have a financial plan and you are floundering and unsure how to plan your financial future, but you have a decent income and you don’t know how to start saving or investing, now would be a good time to seek professional financial advice.
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Disclaimer: I am not a financial professional. All the information on this website and in this article is for information purposes only and should not be taken as investment advice, good or bad.
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