A financial advisor meets with a client in his office.
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When it comes to financial advice, what you pay can vary depending on what you get. An advisor who simply puts you on a passive S&P 500 index fund may not be worth a 1% fee, while an advisor who helps you manage taxes and cash flow, plan for retirement, and save for your college education child is probably worth considerably more. .
For example, suppose you have invested €1.7 million with a financial advisor. A 1% fee is within the average range for the industry, but whether you get a good deal depends entirely on the skills and services of your advisor.
If you’re interested in working with a financial advisor but don’t know where to start, try SmartAsset’s free tool to connect with fiduciary advisors in your area.
Financial advisors have different ways to structure their fees. The most common types of reimbursements are:
Per hour: A fixed rate charged per hour worked.
Fixed: A predetermined amount that you pay for a specific service.
Percentage of assets under management: A variable rate based on a percentage of total assets under management (AUM), typically billed annually or quarterly.
Commissions and performance fees: Commissions are fees your advisor receives for specific trades or trades he executes, while performance-based fees apply when they meet certain goals.
Today, fees based on a percentage of a client’s assets under management are the most common form of advisory fee. A 2022 Kitces survey found that AUM fees were the top source of income for 82% of financial advisors surveyed. Here’s how they work: For example, say an advisor charges 0.5% annually and manages a $100,000 portfolio. At the end of the year, you would have paid €500 ($100,000 * 0.005) in management fees, which may have been debited directly from your account.
Fixed rates and hourly rates are more common among advisors who provide specific services. For example, if a financial advisor does your taxes or plans for college savings, he or she may bill by the hour or charge you a flat rate for these services.
But if you need help finding a financial advisor, consider matching with one using this free tool.
A financial advisor meets with a client in her office.
Financial advisors can provide a range of services.
Fixed fee and hourly fee structures are generally built around specific outcomes. For example, some advisors help you create a tax strategy, a household budget or an overall financial plan. It is also common for a financial advisor to offer a comprehensive range of financial services based on what you need to achieve.
AUM-based fees are generally related to ongoing portfolio management. Advisors who manage client portfolios typically select investments and move money according to a predetermined strategy. Percentage-based compensation attempts to align your advisor’s incentives with yours. The more they grow your money, the more assets they will have under management and the higher their compensation potential can be.
That said, higher costs don’t always translate into better results. As a potential customer, you should look carefully at what you get for your money. If you want comprehensive financial services, how much does the advisor charge for each result? If you want money management, how have their portfolios performed year over year? Make sure you get your money’s worth as even small percentages can add up.
Whether you need ongoing portfolio management or independent financial planning, evaluate those needs and then contact a fiduciary financial advisor who offers those services.
A financial advisor is discussing his fee structure with two potential clients.
The typical percentage-based fee often quoted is 1% of assets under management, although an analysis by AdvisoryHQ shows that average portfolio management fees range from 0.59% to 1.18% of assets under management. The exact rate you pay may depend on several factors, including the services bundled within that rate. For example, a financial advisor may charge more if the AUM fee includes tax preparation and financial planning, while they may charge less if the fee covers only portfolio management.
Robo-advisors, digital platforms that automatically manage your portfolio using an algorithm, tend to be significantly cheaper. According to Robo Adviser Pros, these services generally charge between 0% and 0.89% of assets under management. However, they also offer fewer services. A robo-advisor manages your portfolio based on specific metrics, but generally cannot provide customized advice or services such as financial planning and tax advice.
For an affluent household, it is also important to consider asset-based discounts. Many financial advisors use graduated schedules with lower rates that apply to larger sums of money. For example, an advisor might charge a 1.5% fee on the first $250,000 in a portfolio and a 1% fee on the next $250,000. That advisor might charge as little as 0.75% to manage the next $500,000, meaning a $1 million portfolio would qualify for a discount based on its sheer size.
Ultimately, if you have $1.7 million and are paying 1% in advisor fees, it’s important to ask yourself what you’re getting for your money. This compensation totals $17,000 per year, which may be reasonable considering the level of service you receive and your satisfaction with the advisor.
If you currently have an advisor but want to find a new person to work with, this free tool can help you connect with a fiduciary advisor serving your area.
On average, financial advisors charge between 0.59% and 1.18% of the assets under management for their asset management. At 1%, an advisor’s fee is well within the sector average. Whether that rate is too much or just right depends entirely on what you think of the advisor’s service and performance.
Is it worth paying a financial advisor 1%? This small percentage can really add up to a lot of money over time, so make sure you look at what you’re getting from that relationship in return for this cost.
Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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