What is a normal fee for a financial advisor? The cost of working with a financial advisor can vary widely depending on the services you need, how the advisor charges, and what kind of advisor you choose. To make a confident, informed decision, it helps to understand not only the range of fees but also the structure behind them. Let’s review.
Fee-Only vs. Commission-Based: Why It Matters
Before we look at the numbers, it’s essential to understand how different advisors are compensated. That impacts not only the fee, but the advice you receive.
Fee-only advisors
Fee-only financial advisors are paid directly by you, the client. That’s it. They don’t accept commissions from product providers like mutual funds or insurance companies. Why does that matter? Separating the fee from the product recommendations can reduce potential conflicts of interest. Fee-only advisors are also typically held to the fiduciary standard. This is a legal and ethical obligation to put your best interests first. That means you can be more confident that the advice you’re receiving is designed to serve you, not someone else’s bottom line.
Commission-based advisors
In contrast, commission-based advisors earn money through sales of financial products. While many are well-intentioned and genuinely want to help you, they operate under a suitability standard, which means the products they recommend must be “suitable” – but not necessarily optimal – for your needs. It also leaves the door open to potential conflicts of interest., because some products pay higher commissions than others. Many commission-based advisors provide services on a commission basis as well as fee basis, which can make this distinction a little confusing at times.
Financial Advisor vs. Financial Planner
Another important distinction to make is whether the financial advisor also provides financial planning. Some do, some don’t. A frustrating aspect of the financial services industry is that there is no way to tell by their title, or even their credentials. Anyone can call themselves a financial advisor or financial planner. To know, you simply have to have a conversation and ask. Traditionally, “financial advisors” primary function is to provide investment advice. If that is all you need or want then great, but there is a lot more to your financial life and security than investments.
We use the term “financial planner” to be very clear that we are actively engaged in broader planning. For us, this encompasses investment advice, but also includes other elements of retirement planning such as making sure your money lasts and how to take ax-efficient withdrawals. from your savings.
The reason this matters here is because it’s important to know what the fee pays for. Two advisors may charge the same fee but offer very different services for that fee. Still, other advisors may charge separately for investment management and financial planning. Any of these structures can work well, but again, it’s just important that you know what the fee covers.
Typical Financial Advisor Fees
All advisors do not offer each type of fee structure. It depends on the type of services the advisor provides.
Assets Under Management (AUM) Fees
The most common fee structure among financial advisors and planners is the Assets Under Management (AUM) model. In this arrangement, advisors charge a percentage of the client’s investment portfolio annually. According to research by Michael Kitces, the median AUM fee is approximately 1.0% for portfolios up to $1 million. This fee often decreases as the portfolio size increases, with median fees dropping to around 0.9% at $2 million and 0.8% at $5 million. However, it is very common for the fee to exceed 1% for portfolio balances below $1 million.
It’s important to note that the AUM fee typically encompasses both investment management and financial planning services, but that is not always the case.
Hourly and Flat Fees
Some advisors offer services on an hourly basis or for a flat fee. Hourly rates generally range from $150 to $400, depending on the advisor’s experience and location. Flat fees for comprehensive financial plans can vary widely, typically falling between $1,500 and $15,000.
These fee structures are often preferred by clients seeking specific advice on an issue or a one-time financial plan without ongoing investment management.
Commissions
If you are working with an advisor that is compensated by commissions, those can vary substantially depending on the type of product.
- Insurance Products: Life insurance policies often come with substantial upfront commissions. Agents may earn between 50% to 100% of the first year’s premium, especially for whole life or universal life policies. For example, if you purchase a policy with a $1,000 annual premium, the agent’s commission could range from $500 to $1,000. Subsequent years typically yield lower “trail” commissions, often around 5% to 10% of the annual premium.
- Annuities: Annuity products, particularly fixed and indexed annuities, also offer notable commissions to agents. Commissions for these products can range from 5% to 7% of the total contract value. For instance, a $100,000 annuity purchase might result in a $5,000 to $7,000 commission for the selling agent. These commissions are typically factored into the product’s pricing and may affect the terms offered to the consumer.
- Mutual Funds: Mutual funds may impose sales charges known as “loads.” A front-end load, common with Class A shares, is a commission paid when you purchase the fund, often around 5.75%. So, investing $10,000 could result in a $575 commission, leaving $9,425 invested in the fund. Additionally, some mutual funds charge ongoing fees, such as 12b-1 fees, which can be up to 1% annually, covering marketing and distribution expenses.
What is a normal fee for a financial advisor? It depends on the type of advisor you need.
Selecting the best financial advisor for you involves assessing your financial needs, understanding the advisor’s fee structure, and the services they provide. Regardless of the advisor you choose and their compensation model, always ensure that you understand their fee model, how they are compensated, and the services they provide.
To get help from a fee-only fiduciary and make sure that your investments align with your retirement plan, email me at [email protected] or call 903-471-0624 and I’d be glad to help you.
