So…how much do financial advisors ACTUALLY cost?
While there is much written about what they do, there is very little offered up to answer the question of what do financial advisors cost. In this article we will discuss:
- How financial advisors make money
- What advisory fees are
- What fee structures are best for the client
- Impact of high fees on portfolio growth
Finding a good, cost-effective financial advisor
How do financial advisors earn money?
Wealth managers are paid through advisory fees, which can be charged a few different ways. Financial advisors get paid by:
- Receiving a fee that is a percentage of the assets they manage (AUM)
- Getting a commission for transactions they recommend
- Charging a flat fee for a specific project or analysis
- Charging an hourly fee
In understanding how financial advisors make money, it’s important to understand two terms: fee-only and fee-based. They may sound similar, but there are major differences between the two.
- A fee-only advisor gets paid by any of the methods above other than commission. It is common for fee-only advisors to earn money through AUM fees. We are a fee-only financial advisor in Philadelphia, for example.
- A fee-based advisor gets paid by commissions and is a broker. This is, for example, how insurance agents make money. Whether they are paid this way for all the work they do, or just part of the time, anyone who gets paid by commissions can not be considered a fee-only advisor.
- A fee-only advisor works directly for the client. As the client’s assets grow, the more they are paid. In this sense their interests are directly aligned with the client’s interests. If they are paid by hourly or flat fees, their pay does not increase with the type of recommendations that are made.
What they charge - the financial advisor’s cost - may be high or low, regardless of how they are paid. However, commissions do tend to be less transparent. It’s not clear to the client how much they are paying for the service and how much is going into the advisor’s pocket as pay. This is not optimal for the client as the cost of financial advice should always be clear. Anytime you are talking to an advisor about working with them, ask them to express how the advisor gets paid in writing, and retain it in your records.
Beware of double dipping
It’s rare nowdays, but still necessary to mention that an advisor should not receive an advisory fee and a commission at the same time. Some advisors may engage in double dipping, or charging an advisory fee, while also recommending mutual funds that reward him or her a 12b-1 fee. Class B and C shares of a mutual fund usually charge 12b-1 fees.
Can a financial advisor charge two fees for the same deliverable?
No.
Double dipping is highly unethical. Any advisor who charges both a fee and a commission at the same time for executing the same deliverable should be avoided.
Is it worth paying for a financial advisor?
Is a financial advisor worth it? The value of the advisor to you depends on his or her ability to meet your personal needs, but there are a few general guidelines to keep in mind that are more subjective in nature.
- The most professional financial advisor service model is one in which the advisor works only for the interest of the client and there are no hidden incentives, as is commonly the case with any trusted advisor such as an accountant or attorney.
- Unbiased advice works better for the client. Fee-only advisors work to minimize conflicts of interest, and any that do exist must be fully disclosed. We feel this works in the best interest of the client which is why we have set our firm up this way.
- Fee-only advisors are not the majority of advisors. There is a shift in the industry toward fee-only advisors, but still most advisors are not fiduciary, objective, fee-only advisors; they are either fee-based or they charge straight commissions. In both scenarios, it is probable that the high fees charged have the potential to significantly erode the client’s wealth over time.
We urge you think about the level of transparency about fees that the advisor is required to provide. Registered Investment Advisor firms are fiduciaries who are required to disclose everything. They must minimize conflicts of interest and full disclose those that exist.
On the other hand, advisors bound to the suitability standard have a lesser obligation. They aren’t required to minimize conflicts of interest, or to disclose them. Learn about the difference between the fiduciary and suitability standards, and always ask your advisor which one their advice is subject to.
It is also important to consider the type of service that the advisor provides. Are they just going to invest your money and call it a day? Or will your advisor act as a coach to help you maintain a long-term perspective and uphold discipline? Investing is very emotional and psychological bias comes into play. A good advisor should be your guide through all of this. We’ve outlined several of the biases and the way that behavioral coaching can help in this blog about the benefits of working with an advisor.
Finding a good financial advisor
Since there are a variety of ways that financial advisors earn money, it’s important to consider the cost. But what a financial advisor costs is not the only factor. The lowest cost financial advice isn’t necessarily the best for you.
With so many financial advisors out there, how do you know who is a good one and who isn’t? We encourage investors to go about their search logically with a set of guidelines and a thorough selection method. Here are some tips for finding a good financial advisor. Although this blog is written with a geographic focus in mind, the principles are universally applicable.
Concluding thoughts on what financial advisors cost
Finding someone who can provide value over and above the financial advisor’s cost will be of benefit. Know what the fee gets you, the level of transparency your advisor is willing to provide, how they charge for both their service and the underlying investments, and the standards they are required to follow.
We are a financial advisor in the Philadelphia, PA area, but we work with clients across the country. We provide fee-only, objective advice to our clients. We carry out our investment strategies using low-cost ETFs for our clients. If you would like to discuss a possible relationship, contact us.