Find out the Cost of Hiring a Financial Planner
Financial planner fees vary. Some financial advisors charge fees in the form of commissions; others in the form of an hourly rate or percentage of your account value. Here are the six most common ways financial planners charge fees:
- Percentage of assets that they manage on your behalf, typically anywhere from 1% - 2% per year. The more assets you have, the lower the fee.
- Commissions paid to them from financial or insurance products you buy through them.
- Combination of fees and commissions sometimes called "fee-based."
- Hourly rate.
- Flat fee to complete a specified project.
- Quarterly or annual retainer fee.
Details on each of these payment options are covered below.
1. Percent of Managed Assets
This is one of the most common ways that a financial planner--or a financial advisor or investment advisor--will charge you.
When you hire a planner who is compensated in this way, it is important to understand if the planner is providing investment management and financial planning or just investment management. Expect to pay a higher fee if the planner is providing full-service financial planning along with investment management.
You will also want to ask an advisor who charges in this way if they are fee-only or fee-based. Fee-only advisors are more likely to use low-cost funds in your account, minimizing the overall expenses you will pay. Fee-based advisors may be able to collect commissions, in addition to the percentage fee charged on assets.
With an asset management percentage fee, the advisor makes more money as your account value increases. If your account value decreases, they will then make less money. In this way, they have an incentive to grow your account and minimize losses.
Many clients like this structure as fees are debited right from their account. No check has to be written, and the fees don't have to come out of the monthly budget. Additionally, fees debited from IRAs are being paid with pre-tax dollars, which can be highly beneficial for those in retirement.
A typical asset management percentage fee can range from 2.0% per year on the high side to .50% per year on the low side. Typically, the more assets you have, the lower the fee.
Some planners have devised interesting variations on this payment option, such as charging a percentage of net worth (with the goal of helping you increase your worth) or a percentage of adjusted gross income (with the goal of offering career counseling to help you boost your income).
This is another common way for a financial planner to charge for services. Some of these people are good financial advisors; some are just good salespeople. Keep in mind that their advice can be influenced by the way they are compensated.
Commissions can take the form of a front-end sales load charged on a mutual fund or a surrender charge on an annuity. Commissions may also be paid directly to the advisor from the investment company, as in the case of the sale of many non-publicly traded REITs.
Ask for a clear explanation of how your advisor is paid and exactly how much they will receive if you buy the investments or insurance products they recommend.
3. Combination of Fees and Commissions
Many advisors today collect fees and commissions. These advisors are called "fee-based." It is important to understand the difference between a "fee-only" advisor and a "fee-based" advisor. "Fee-only" advisors cannot collect commissions.
NAPFA, the National Association of Personal Financial Advisors, has copyrighted their "fee-only" logo and member advisors must submit documentation and take an oath that they do not sell any investment or insurance products. NAPFA can be a great resource to use if you are looking for a "fee-only" financial planner or investment advisor.
4. Hourly Rate
This can be a great way to pay for financial advice if you are willing to implement the advice on your own. For example, you may pay a financial advisor an hourly rate to tell you how to allocate the investments in your 401(k) plan. You would then be responsible for actually making the changes they suggested.
Since an hourly rate is not tied to the value of investments, or generated by the purchase of any specific investment, you can feel confident you will receive objective advice.
Just like attorneys, or accountants, hourly rates will vary widely from planner to planner. Expect to pay a higher hourly rate for experienced advisors or advisors who have an area of specialty. Lower rates will be charged by less experienced advisors.
To find an advisor who charges an hourly rate, check out the Garrett Planning Network, which offers a search service to connect you with their network of planners who offer advice at an hourly rate.
5. Flat Fee to Complete a Specific Project
When you need a project completed, such as an initial retirement plan, it may make sense to pay a flat fee to have someone crunch the numbers and help you understand everything that goes into creating an accurate retirement plan projection.
Since a flat fee is not tied to the value of investments, or generated by the purchase of any specific investment, you can feel confident you will receive objective advice.
The fee should be quoted upfront, along with a clear description of what will be provided for that fee. Ask if follow-up meetings or questions are included.
6. Retainer Fee
If you have a more complex situation, such as ongoing stock options to be exercised, a small business, rental properties, or a need for regular income from your investments, then you may benefit from paying for ongoing advice.
Since a retainer fee is not tied to the value of investments, or generated by the purchase of any specific investment, you can feel confident you will receive objective advice.
After learning about the complexity of your situation, a financial planner can tell you what your quarterly or annual retainer fee would be and the services included in that fee. A written contract detailing the fee and services is usually provided.
How Can I Know How my Investment Advisor Will be Paid?
Always ask a financial advisor for a clear explanation of compensation before you hire one. Look for an honest, straight-forward answer and steer clear of folks who try to avoid the question, tell you not to worry, or imply that services are free. In addition, many online advisor search engines allow you to search by specific criteria, such as what type of payment structure an advisor uses.
Please note: In this article, I use the terms financial advisor, investment advisor, and financial planner interchangeably, but a title may not provide an accurate depiction of the services offered. You'll need to ask questions to find out the type of planning or advice a financial planner provides.