| Financial Advisor Fees by Type | |
|---|---|
| Fee Structure | How It Works |
| Asset-Based | Clients pay a percentage of assets under management, often in a tiered structure. This type of financial advisor fee is common. |
| Commission | Advisors earn fees by the trade or transaction. |
| Fee-Only | In contrast with commissions-based structures, fee-only services charge per service. |
| Hourly Fee | Some financial advisors charge on an hourly basis for services. |
| Flat Fee | Typically, advisors who charge a flat fee offer a specific service for a set rate. Flat fees may also be combined with commissions in some cases. |
| Performance-Based Fees | Some advisors may assess an additional fee if their service outperforms a specified benchmark. |
Value for Your Money
For the traditional 1% fee, clients can expect asset management services and a full financial plan that is updated at least annually, says Jacob Lumby, a graduate associate instructor of personal financial planning at Texas Tech University.
Some firms provide tax-planning services at no additional cost, but many partners with accounting firms charge for all tax-related services. The same is true of legal services, he adds.
“For high-net-worth clients with advanced planning needs, these fees can be worthwhile,” says Lumby. “They need high-touch, custom plans with many different professionals involved.” High-net-worth clients are very sophisticated, and they’re also very busy, says O’Donnell. They aren’t going to pay fees for the value they aren’t getting, but peace of mind and less stress can make a financial advisor’s fee worthwhile.
An advisor should be able to explain how they’re adding value for any amount charged above standard rates. Is the advisor acting as your personal chief financial officer (CFO), for example, and helping with tax planning or estate planning? Are they evaluating where you are vulnerable from an asset protection standpoint? Is the advisor helping you ensure that your charitable gifts have a bigger impact? Input at that level goes beyond money management to the burgeoning realm of wealth management.
Passive vs. Active Management: Value vs. Cost
A passive investment strategy involves buying and holding investments long-term. It looks to maximize returns by minimizing buying and selling. It relies on the theory that the market ultimately posts positive returns over time, and it eschews attempting to make money off short-term fluctuations or market timing. It is intended to build wealth incrementally but inevitably.
For example, “If a client wants to reduce fees to razor-thin levels, some advisors will manage ETF-based portfolios that track different sectors of the market,” says David P. Sims, a certified public accountant and the Director of Finance and Revenue Cycle Management for Master Center for Addiction in Richmond, VA. Exchange-traded funds (ETFs) usually contain a basket of equities or bonds that mirror an underlying index, such as the or an index of U.S. Treasury bonds. Passive management requires less work from the investment advisor and usually results in lower fees for the investor.
A portfolio that’s actively managed usually involves a team of investment professionals, headed up by a portfolio manager, who is engaged in monitoring the portfolio’s performance and holdings. The process would involve buy, sell, and hold recommendations and trades designed to outperform the market, which is typically measured by a benchmark index, such as the S&P 500.
“Expect to pay more for actively managed portfolios,” says Sims. “If the investment advisor puts more effort into beating the market, then clients should expect to pay a higher fee for assets under management.”
However, just because you can pay extra for active management doesn’t mean you should. Actively managed funds tend to underperform index funds, according to S&P Dow Jones Indices, which tracks the performance of actively managed funds versus market benchmarks. Per the SPIVA U.S. Scorecard for mid-2023: "a majority of large-cap managers outperformed in only (three) of the last 23 years (missing by a whisker in 2022)."
If you’re going to hire a financial advisor with an actively managed strategy, be sure to know the types of securities in which the advisor will be investing and whether those holdings align with your long-term financial goals and risk tolerance level.
Studies have shown that actively managed portfolios more often than not underperform their stated benchmarks over time, though there are some that hit them or even exceed them.
Vanguard and Betterment
If you want to work with a professional advisor but don’t need highly personalized service, Lumby suggests looking at Vanguard’s Personal Advisor, which offers financial planning and wealth management for an annual gross advisory fee of 0.35% for all-index options or 0.4% for active/index options.And if you need only portfolio management, not financial planning or advising, consider wealth management services such as Betterment, which has a fee of $4 per month or 0.25% of AUM annually.
How To Reduce Costs, But Get Quality Advice
Although the goal is to reduce fees and expenses by as much as possible, it’s important to consider the level of service and performance the financial advisor offers. Below are some effective tactics for cutting financial advisor expenses.
Use a Fee-Based Financial Advisor
You’ve probably heard this before, but the best way to make sure you’re getting unbiased financial advice that’s in your best interest is to hire a fee-based advisor, not a commission-based one. Fee-based advisors have a greater incentive to grow their clients’ assets, according to Sims. “In the long run, this is a win-win solution for the client and the advisor,” he says.
Avoid Up-Front Loads
Try to avoid “big upfront loads and other silly fees that often accompany products being sold by select brokers,” says Lumby. “Upfront loads are sales and commission charges that investment managers or funds charge investors at the onset of investing money with them.
In today’s low-cost investment world, there is no place for loaded mutual funds or related products. Fees are one of the leading indicators of investment results. Low fees result in more money in your investment account and a bigger legacy to pass on.”
Negotiate a Lower Fee
Another way to pay less is to negotiate a financial advisor’s fee. Be prepared to explain why you feel it is too high and why it makes sense for the advisor to take you on as a client for less than what their firm normally charges.
If you like the advisor but want fewer services than they typically provide for a client, they may be able to justify charging you less. The same is true if you’re bringing them more assets than they typically manage.
Hire a Newbie
You could also take a chance on a newcomer to financial advising. "Often, they know they can’t demand top dollar and are hungry, need the business, and are willing to dicker," says Gary Silverman, CFP, founder of Personal Money Planning in Wichita Falls, Texas, where he serves as its investment advisor and a financial planner.
Though you might get what you pay for, you’ll probably get more attention, says Silverman. What’s more, he adds, “Folks that are new usually know they are a bit ignorant, so they’ll study hard before handing you a recommendation. Just because someone has been doing this for three years doesn’t mean they do a poorer job than someone who’s been at it for three decades.”
What Is the Average Fee for a Financial Advisor?
The average fee for a financial advisor generally comes in at about 1% of the assets they are managing. Be mindful that you may still pay a higher nominal dollar as there's a higher base the percent fee is applied to. However, this may mean that the effective percentage of assets may decrease as your portfolio increases.
Active vs. Passive Management: Which Is Better?
There really is no answer to this question. Active management allows you to take advantage of short-term market fluctuations, but it also carries greater risk. Passive management may not generate as much return in the short run, but over time, it may do as well or better than active management.
Fee-Based vs. Commission-Based Financial Advisor: Which Is Better?
A fee-based advisor is definitely the way to go because their fees are fed by their success in making you money. A commission-based advisor has too much incentive to sell you investments that may be better for them than they are for you.
The Bottom Line
When looking for a financial advisor or deciding whether to stay with your existing one, remember that you want the advisor who provides the best value, which will not necessarily be the one who comes at the lowest price. Think about which services you really need and how much they’re worth to you, then find a financial advisor who fits your criteria.
