You want to make the best investment decisions possible, and you know that picking the right financial product at the right time can make or break your portfolio’s performance.
Faced with such a high-stakes decision about your future, you might ask yourself: Is it worth paying a financial advisor to help me make the right choice? How much does a financial advisor cost? Do I need investment advice?
Understanding what a financial advisor is and what they do
A financial advisor helps you invest. They offer guidance on mortgages, insurance, retirement, investing, and general financial management. Together, you’ll set out a comprehensive financial plan, develop an investment strategy tailored to your financial goals, and build a portfolio that meets your unique needs.
Types of financial advisors
There are three basic types of financial advisors:
- Traditional financial advisors: This is what most people have in mind when they think of a financial advisor. These professionals often work for an investment firm or bank and take on several clients whose investment strategies and portfolios they manage. They offer personalized advice and hands-on investment management.
Traditional financial advisors include Certified Financial Planners (CFP), brokers, Registered Investment Advisors (RIA), and wealth managers.
- Online financial-planning services: Unlike traditional advisors, online financial-planning platforms are automated to help you set your financial objectives and build your portfolio. Although their services are less personalized than traditional advisors, they’re still comprehensive and sometimes include one-on-one meetings with an advisor.
- Robo-advisors: These are automated online tools that use algorithms and AI to make investment recommendations. Robo-advisors are more affordable than traditional advisors and online financial-service platforms but offer a limited set of services.
Benefits of having a financial advisor
Working with a financial advisor has its advantages. Here are three situations where you might decide that paying a financial advisor is worth it for you.
- You’re just starting out: If you’ve never given much thought to financial planning and managing investments, a financial advisor can show you the ropes and help you make intelligent decisions.
- You don’t have time: Maybe you’re too busy to manage your finances, or you prefer to spend your time doing something else. Delegating your finances to a professional can free up your schedule while ensuring that your investments are in good hands.
- You want to take your investment to the next level: Even if you already have a solid grasp of investing strategies and financial planning, it can always help to have a second opinion. You might find that the cost of a financial advisor pays for itself with extra returns on investment.
Financial advisor vs. financial planner
What’s the difference between a financial advisor and a financial planner? They both offer financial advice, but a financial planner helps with the big picture while a financial advisor specializes in investment strategies.
A financial planner helps you manage all of your financial concerns, like making a budget, paying off debt, estate planning, retirement planning, taking out loans, purchasing insurance, and making investments for the future.
A financial advisor focuses on your investments and asset management. They assess your risk tolerance and help build a diversified portfolio to meet your specific investment needs.
Understanding the fee structure and why it matters
Before hiring a financial advisor, it’s essential to know what you’re paying for. Below, we break down the basic financial advisor fees you’re likely to come across.
Fees by service
- Robo-advisors typically charge an assets-under-management (AUM) fee of 0.25 percent to 0.50 percent, making them a low-cost alternative to full-service financial advisors.
- Online financial planning services charge either an AUM fee or a flat annual fee. AUM fees range from about 0.25 percent to 0.90 percent, and flat rates start at around $400 and can run to several thousand dollars.
- Traditional financial advisors use one of several different fee structures. They can charge AUM fees, flat rates (per service or per month), hourly rates, and commissions.
Commission-based vs. fee-based financial advisors
Financial advisors can earn income from commissions, fees, or a combination of both.
Commission-only advisors earn commissions on the different financial products they sell. The more they sell, the more they earn, and commissions are paid by the investment company that offers the product.
You can benefit from their services for free, but be aware that this arrangement can potentially lead to a conflict of interest.
Fee-only advisors don’t earn any commissions from investments. Instead, they charge fees directly to their clients to make a living. Fees can be hourly, flat-rate, or based on assets-under-management (AUM).
Fee-based advisors charge fees and may also accept commissions on investments.
Flat fees vs. hourly fees
Some financial advisors charge flat fees, charge using monthly or yearly retainers, or charge based on the required service. In the former case, you pay a retainer for an all-inclusive service over the given period. In the latter case, the fixed fee for a given service doesn’t change, no matter how long it takes to provide.
Other advisors charge hourly rates, usually between $150 and $400 per hour depending on their experience, location, and service.
Other fees to consider
When you hire a financial advisor to manage your investments, you usually also open a brokerage account to hold those investments, which comes with its own set of costs.
Also, keep in mind that certain financial products – like mutual funds and exchange-traded funds (ETFs) – often charge management fees in addition to your advisory fees.
Minimizing fees as much as possible
Depending on how many funds you have to invest, you may find a robo-advisor or online financial-planning service more advantageous. That’s because the less you invest, the higher the AUM fees you’ll pay for a traditional financial advisor.
If you decide a traditional advisor is right for you, consider the fee structures discussed above. When shopping for an advisor, don’t hesitate to ask questions about fees and remember to negotiate.
Knowing when to hire a financial advisor
Several tell-tale signs suggest you should consider hiring a financial advisor.
If you’ve been putting off dealing with your finances or haven’t given them much thought, you might be the ideal candidate for professional financial services. An advisor will put you on the right track and help you make your money work for you.
On the other hand, if you’ve been managing your own investments based on personal research and not getting the results you’d like, a financial advisor can call your attention to details you may have overlooked and help you make better financial decisions. After all, they have years of training and experience under their belt.
Finally, if your finances have gotten out of control and you don’t know where to begin, a financial advisor is exactly what you need. They can help you get organized and clarify your financial objectives.
The bottom line: are financial advisors worth it?
Financial advisors offer valuable services that can sometimes pay for themselves with the added returns on investment they generate.
But whether or not hiring a financial advisor is the right decision for you depends on various factors, not least of which is how much money you have to invest. Consider all your options and shop around to find the best deal.
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