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.
This article explains fiduciary obligations and relationships.
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.
Online advice
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
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.
This article compares some of the main robo-adviser services.
Get out of debt first
If you are struggling to get out of debt, then you need a different kind of financial advice.
This article reviews some of the main recommended debt relief services.
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.
Single-page summary
Here is a single-page PDF summary of the average cost of a financial advisor.
I hope you found this article interesting and useful. Do leave me a comment, a question, an opinion, or a suggestion and I will reply soonest. And if you are inclined to do me a favor, scroll down a bit and click on one of the social media buttons, and share it with your friends. They may just thank you for it.
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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Hi Andy,
This is a really informative and important article. At the moment I am not in a position where I need financial advice, but I may do in the future, and I should have in the past. So I will never rule out using a financial adviser in my lifetime.
There are A LOT of people all over the world who weren’t in financial difficulty , but now are because of the pandemic. However, are they able to afford financial advisers? It is a catch 22 for them in this case. I am sure they can find an affordable financial adviser close to them, and if I can help people too then I will.
Thank you for sharing such valuable information and I hope you can help many people who are in need of financial advice.
All the best,
Tom
Hi Tom
You make a very valid point. The question of affordability is one that most people who are contemplating hiring a financial advisor have to judge for themselves. There is general anecdotal evidence that the cost of basic financial advice should pay itself back within about two or three years. But if you think about it, that is quite a difficult thing to measure. Unless you know for sure what someone would have done with their money and their investments in the absence of advice, assuming they have investments, then the only reasonable comparator would be against a market index. The problem there is that most people who need financial advice are unlikely to be disciplined enough to just be investing in the most suitable index-linked funds.
In summary, I think it is a very subjective call. I don’t think there is a silver bullet in the area of financial advice and because each person’s situation is unique, there is no one-size-fits-all answer.
Thanks for the comment
Best regards
Andy
Hi Andy,
In short I think we can all agree, ‘fail to plan and you plan to fail’. Financial planning is extremely important and to pay that amount for an advisor when there are abundant of information on the web seems a bit wasteful.
I leave my investment funds to a robo advisor and it’s been a fruitful one so far. I think it’s best to put your eggs in different baskets. Your article is useful to know the gist of investment and the different platforms available.
Wonderful article!
Cheers.
SAM
Hi Sam
I agree with you. There is no substitute for educating yourself about finances and there is so much excellent information available at little or no cost. Not everyone is comfortable with that approach though, or they don’t have the time and prefer to just hire someone to make the plan and recommendations for them.
I think it is a question of different horses for different courses. So much about finance is learning what kind of investor you are and what levels of risk tolerance and risk appetite you are comfortable with. Some people are better off working that out for themselves, while others are better off paying for advice.
Thanks for the thoughtful comment
Best regards
Andy
Great post man, so important to start investing as soon as you can. I just helped my son get started and he is was 16 at the time. Here in Canada we have TFSA which is a tax free savings account which allows you to invest in a mutual funds tax free. Pretty cool deal. And great tip on getting out of debt first. Bang on! Cheers man
Hi Robb
Thanks for the comment and congratulations on getting your son started at 16. Our grandfather did the same for us even when we were much younger. This was in England and we all had Building Society savings accounts. These were member organizations. The money you paid into your account as a saver was used to finance the mortgages of other members. I remember we were so keen on this form of savings that we each had an account with two building societies. I guess my grandfather was nervous about putting all our eggs in one basket.
Here is an article about the conservative approach to investing favored by my grandfather.
Thanks again for your positive comments
Best regards
Andy
This is all very valuable information. I have never thought of having a financial consultant before. I am at a place in life now that it just might be time.
I appreciate you defining some of the words and terms of the trade as those words can be complicated to someone who is new, like me!
Hi Brianna
Thanks for the comment. If you are unsure whether you need financial advice then I would suggest you keep reading and researching. You will put yourself in a better position if at least you know what questions you are looking to solve. Then you will be able to hold a meaningful and efficient conversation with a financial advisor.
Good luck and best regards
Andy
This was very timely article for me to find. I have been trying to get a better grasp on my finances and begin investing more. I have had several free consultations with financial advisors but have yet committed to anyone.
Perhaps it shows my lack of understanding and why I need to research more but I never knew about Fiduciary obligations from an advisor.
I wonder why none of them had mentioned that yet?
Hi Lee
I have been exactly in that same situation. Many years ago, with a young family, I was in a new job and receiving higher pay and I had disposable income to invest beyond what was already being paid into my pension plan. There was an investment advisor doing the rounds among colleagues. He openly said that he got his commission on the funds he was promoting. That was the first time I had any contact with a financial advisor other than at my bank so I thought that working on commission was standard. Little did I know.
I am glad this information was timely for you.
Best regards
Andy
These days I see lot of FREE “Financial Planning Softwares” wherein you enter your numbers and within few minutes a Financial Plan is ready for you. Also, when it comes to making investments there are DIY (Do it Yourself) platforms which provide best recommendations / schemes and basis that one can make investments on their own.
With all this I think the “human touch” is missing. The old traditional ways of meeting the financial advisor face to face and then making investments are soon been taken over by DIY platforms. Not to say there is lot of free valuable information available on the web which is good enough to make decisions if you are financial savvy.
Somewhere with all this I feel the need to hire a Financial Advisor is diminishing ? What’s your take ?
Hi and thanks for the comment.
I agree there is a lot of free financial information particularly online. There are also many excellent financial educational books and let’s face it when you consider the length of time it takes to read and fully digest books like these, the cost is minimal. There is a great deal that every individual can do for themselves to develop a financial plan, and that mostly involves research and educating themselves. Not everyone is willing to do that, so hiring a financial advisor is a good thing in these cases. Another common situation is that people are nervous about financial risk, and just prefer to have a professional financial expert manage their investments. Even very capable and financially savvy people may find it advantageous to hire a financial advisor either just to develop a plan or to manage their investments especially if they are high wealth individuals and focus most of their time and energy running their business.
I think in summary, one can say like all things in finance the question of whether to hire a financial advisor should be examined from a cost, benefit, and risk perspective and it is best to take the emotion out of the decision.
Thanks for the comment and best regards
Andy
Hi Andy,
Amazing article, truly appreciate your efforts to share this important article in present situations since financial security is an issue for all of us.
It seems life has put on hold for an indefinite time and a new reality has hit hard and many financial plans have had to adapt. Your explanations on the responsibilities of financial advisors and how to work with them are really timely and helpful.
Thanks
Cheers!
Hi Samantha
thanks for your positive comment. I am glad you enjoyed the article.
Best regards
Andy