How Much Does a Financial Advisor Cost?

Financial advisors are professionals who help their clients in a variety of areas including financial planning, investing, retirement planning, estate planning, tax planning and others. Like any professional service provider such as an accountant or a lawyer, financial advisors do not work for free.

There are a number of compensation models for financial advisors. You should understand these different models when selecting the right advisor for your needs. You should also fully understand ALL costs and fees that will be incurred in a relationship with the advisor.

Financial advisor fees by type and service

Financial advisor fees can vary based on the type of advisor, the type of services provided and the type of advisor delivering the services. The first step in understanding and evaluating a financial advisor’s fee is to understand the three main ways a financial advisor is compensated.

Fee-only

Fee-only advisors do not earn commissions from investments or the sale of financial products. Their only source of compensation is from fees paid by their clients. These fees might be in the form of a percentage of the investment assets they advise you on, a retainer, a one-time project fee or an hourly rate. Fee-only advice eliminates a major source of conflicts of interest that can taint the advice delivered by an advisor. Most fee-only advisors adhere to the fiduciary standard that requires them to put their client’s interests first when providing them advice. 

Fee-based

Fee-based compensation can take a number of forms, but it is a combination of fees paid by the client and commissions received on financial products. One example is a scenario where an advisor does a financial plan for a set fee, then implements their recommendations with commissioned investment and insurance products. Another common example is an advisor who primarily works with clients on a fee basis, but still has some older clients for whom they provide service commissioned insurance products they have sold to the client in the past.

Commission-only

Advisors who are only compensated by commissions from the sale of investment and insurance products only get paid if they sell something to their clients, and in some cases they earn trailing commissions from certain financial products. Some advisors may be subject to conflicts of interest in advising clients while only earning commissions since they only get paid if they sell them something.

It is also important to understand any certifications or professional designations that the advisor might hold. The premier designation is the Certified Financial Planner (CFP) which is considered to be the gold standard for advisors providing financial planning and advisory service to consumers. There are certainly other worthwhile designations and you should ask about an advisors’ professional designations as part of the process of selecting the right advisor for you.

Within these parameters, there are different types of services an advisor might offer. Some of these are:

Robo-advisors

Robo-advisors are online advisory services that focus on helping clients with their investments. They typically generate investment advice for clients based on a computer algorithm. Some robo-advisors may offer access to human advisors for service such as financial planning.

Typically robo-advisors charge based on the level of assets under management. A common fee structure is 0.25% to 0.50% of the assets under advisement.

Human advisors

Human advisors may use a variety of fee structures based on the type of services provided and their business model.

• Percentage of assets is a fee for advisory services model that is based upon the investment assets for which the advisor provides advice. Their services might include investment advice, ongoing financial planning advice and other services.
• Retainer fees are typically a flat fee for ongoing financial planning and advisory services. These fees may be paid monthly, quarterly or annually.
• One-time project fees may be used to cover the cost of a one-time financial plan prepared for a client. This fee would cover this project only and not other services that may result from doing the plan.
• Hourly fees might be used by advisors who provide planning advice on an as-needed basis.

Financial advisor fees vs. robo-advisor fees

Robo advisor fees are generally assessed on a percentage of assets basis: in other words, you will be charged an annualized percentage rate of the assets under advisement by the robo advisor.

Percentage of assets is also a method used by human advisors in some cases.

The difference is robo-advisors typically develop a portfolio allocation for their clients based on the robo advisor’s computer algorithms. Human advice typically is not factored into the equation. In some cases robo advisors will offer access to human advisors on their platform, though this usually entails an extra fee. Human advisors may also bill clients based on a percentage of assets model, but they add a human element to their advice recommendations. In addition the percentage of assets fee may also include other financial planning and wealth management services.

The fees charged by a human advisor will often be higher, but their services include their human professional expertise versus relying solely on a computer algorithm.

How to reduce financial advisor fees

As with any professional service provider such as a lawyer or accountant, the first step is to determine what type of financial advice and what type of advisor you need. This can help ensure that you don’t hire an advisor that provides services that you may not need and charges fees that are higher than you should be paying.

You should also compare advisors offering the types of services that you determine you need. Don’t be afraid to ask them not only how much they charge for the advice rendered, but also about other expenses associated with their services. These might include costs associated with their preferred custodian of financial products they use. For example, if they represent Fidelity products, there may be fees associated with the funds they invest in for you in addition to the advisory fees.

Also be sure to ask them about all ways in which they would be compensated for the advice rendered to you. Do they receive commissions of any type? This can include not only commissions from the sale of an investment or other financial product but can also include trailing commissions on products such as some share classes of mutual funds.

Are financial advisors worth it?

The answer to this question is that they are in many cases, but you have to weigh the services provided, the advisor’s experience and expertise and the cost of the services provided.

A financial advisor can bring a number of benefits to a relationship with a client, including their professional expertise and a detached third-party perspective on your situation.

The more in assets and the more complex your situation is, the more likely that the advisor of a knowledgeable and experienced financial advisor can provide benefits well in excess of their fees.

Sites like WiserAdvisor and SmartAsset both offer access to financial advisors and information about the criteria to use in selecting the right advisor for your needs.

Frequently asked questions (FAQs)

What is the average cost of using a financial advisor?

According the Harness Wealth Management, average costs for a financial advisor for 2023 are:

• Percentage of assets: Range from 0.5% to 2.0% of assets on an annualized basis.
• Hourly fees: From $120 to $300 per hour.
• Flat fees: $1,000 to $3,000 range.
• Retainer fee: Between $6,000 and $10,000 annually, which may be paid at various intervals throughout the year.

How much money should you have before using a financial advisor?

There is no official hard and fast rule that says you need to have a certain amount of money before deciding to hire a financial advisor. Some advisors may have an asset minimum or a minimum fee that is loosely tied to a minimum level of assets. Smart Asset suggests that having investable assets in the $50,000 to $500,000 is a good starting point to consider using a financial advisor. Different types of services will generally have different minimums. For example, a fee-only advisor who provides hourly advice on an as needed basis may not have any sort of asset minimum. On the other hand, a financial advisor focusing on investments and wealth management.

What is the difference between a financial planner and a financial advisor?

A financial planner specializes in creating a financial plan covering areas such as investing, estate planning, retirement planning, tax planning, insurance and other areas of their client’s financial lives. A financial advisor generally provides advice on a client’s investment portfolio, but their services may also include financial planning and comprehensive wealth management services. In either case, both types of advisors must be registered at either the state or federal level as investment advisors if they provide invest advisory services.

Are financial advisor fees tax-deductible?

Since the implementation of the Tax Cuts and Jobs act that went into effect beginning with the 2018 tax year, fees paid to a financial advisor are no longer tax deductible.