Are you thinking of hiring a financial advisor, but have no clue how much it will cost? Working with a financial advisor can be a valuable investment when it comes to managing your money and planning for the future. The cost of a financial advisor ranges from a small percentage of your investment portfolio to several thousand dollars per year. In this blog, we’ll explore how much financial advisors charge, the different factors that can impact their fees, and whether financial advisory fees are tax-deductible.
How much does a financial advisor cost?
The fees charged by financial advisors vary depending on several factors. These factors include their business model, scope of services, complexity, and level of experience.
The average cost of working with a financial advisor in 2023 ranges from:
– 0.25% to 2% of the assets they manage
– $3,000 to $90,000 per year for comprehensive financial planning
– 3% to 6% commission fee on the products that they sell
– $200 to $400 for an hourly consultation
– Flat fee of $2,000 to $4,000 for a one-time service.
The costs vary greatly, as you can see.
Why do the costs vary significantly? Because the industry is highly fragmented. Most people don’t know how much a financial advisor costs. Many don’t know where to find good alternative financial advisors. Because of these reasons, many advisors get away with charging way above market price.
Here are some financial advisor fee comparisons for specific regions:
- Financial advisor cost in Washington DC
- Financial advisor cost in Maryland
- Financial advisor cost in Virginia
How much time will a financial advisor charge for?
Typically, financial advisors dedicate somewhere between 20 and 40 hours per year per client. The typical service team devotes 36 hours per client in the first year of a relationship, and 21 hours in subsequent years (The Kitces Report, 2023). If your financial situation is more complex and requires more intensive one-on-one analysis, evaluation, and help to work through major money decisions, then a financial planner may dedicate upwards of 50 hours per year.
What determines financial planning costs?
Financial planning costs vary depending on several factors. Some of these factors include:
1. Scope of services: The range of services that a financial planner offers can affect the cost. For example, a comprehensive financial plan will cover many topics and may cost more than a financial plan that only addresses one financial topic.
2. Time: The amount of time that a financial advisor spends on your financial plan can affect the cost. The more complex your financial situation, the more time it will take to create a comprehensive financial plan.
3. Expertise and experience: Like most professionals, a financial planner who is highly experienced and knowledgeable will likely charge more than someone who is just starting out as a financial planner.
4. Fee structure: Financial advisors can charge in a variety of different ways and the fee structure can affect the cost of financial planning.
How do financial advisors charge fees?
There are six ways that financial advisors charge fees. When you choose a financial advisor, it’s important to understand their fee structure. Here are the six common ways that financial advisors charge for their services.
1. Assets under management (AUM)
This is the traditional and still most common way a financial advisor charges fees. Assets under management (AUM) is the total market value of the investments that the financial advisor manages on behalf of the client. This fee pays the financial advisor to invest your money based on your short-term and long-term goals, risk tolerance, timelines, and other factors specific to your individual financial plan.
Cost: The median AUM fee is 1% of total assets being managed, according to research by Bob Veres’ Inside Information. For example, if you have $500,000 in assets under management, you would pay $5,000 a year. The median fee drops to 0.85% for portfolios over $1 million.
Some firms charge as low as 0.5% of assets, but may charge a minimum fee, like $5,000.
We have also seen firms charge as much as 2%, likely because their clients don’t know they are overpaying and it’s a hassle to switch advisors.
AUM gets really expensive once you have more than $2 million in assets. You may start paying close to $20,000. Because of this, there is a growing trend of flat-fee advisors who want to disrupt the expensive AUM model.
Robo advisors typically charge 0.25% to 0.40%. Keep in mind though: 1) your portfolio will be invested depending on how “correctly” you answer their questionnaire, 2) they may not consider your overall financial situation, and 3) they may not advise you on which types of accounts would be best to put your money into.
What you get: Either of the two types:
Comprehensive: Some AUM firms provide both investment management and comprehensive financial planning services. This is common among smaller financial advisory firms with CFP® credentials. A study by Vanguard showed that comprehensive financial planning can provide up to, or even exceed, 3% in net returns. Another study showed that those who worked with a comprehensive financial advisor built up to four times more wealth.
Investment-only: Many AUM firms will just focus on managing your investment portfolio, and will not give guidance on how to achieve your financial goals. This is common among robo advisors and big box firms like Morgan Stanley and Merrill Lynch (both of which may charge up to 2%, double the median AUM fee). Be sure to ask what you’re getting.
Downside: 1) It gets expensive the more assets you have being managed, 2) many advisors will not accept clients with less than $500,000 or $1 million in investable assets, and 3) if you get an investment-only AUM advisor, you will not receive holistic financial planning and guidance on how to achieve your financial goals.
Best For: AUM may be best for retirees who want their old 401(k)s to be actively managed. Look for a financial advisor who charges 1% or less of the assets they manage for you, and who does holistic financial planning.
2. Flat Fee
This is a gaining trend among advisors who are challenging the expensive and exclusionary AUM model. Flat fee advisors charge a fixed monthly or quarterly fee. They typically provide comprehensive financial planning and are usually fiduciaries. They do not earn commissions and are only compensated by their clients.
Flat fee advisors are a subset of fee-only advisors who charge by the hour, project, fixed fees, AUM, or a combination of these. Fee-only financial planners are often viewed as the most unbiased and transparent advisors.
Cost: Flat fee advisors from the XYPN Planning Network typically charge $3,100 to $9,600 per year. (There are a few flat fee financial advisors that charge as much as $15,000 or $25,000 a year. It’s likely a combination of highly complex situations, good marketing, and/or clients not knowing what other advisors charge.)
What you get: Comprehensive financial planning, which can provide up to, or even exceed 3% net returns. This will usually include investment advice. The advisor will create a financial plan, help you implement it, monitor your progress, and adjust as needed.
Downside: None. You just need to compare the value, cost, and fit among the various flat fee advisors in your area.
Best For: Flat-fee fiduciary advisors are great for 30s and 40s professionals and entrepreneurs who want to build their wealth and get unbiased financial advice.
3. Fee-based financial advisor
Fee-based financial advisors charge a set fee but may also accept commissions from investments and products. They are a hybrid between an AUM and a commission-based financial planner. Sometimes they are paid directly by their clients and other times they earn commissions from products they sell to their clients. This means that there may be a potential conflict of interest.
For example, Edward Jones and Ameriprise are fee-based advisors because they can manage your assets via AUM, and also sell you insurance and annuities and the advisor gets a commission.
Cost: Typically range from $2,000 – $90,000 per year.
What you get: Likely investment management, plus being offered insurance and other financial products.
Downside: Huge conflict of interest. They will offer you financial products that may not be in your best interest or the best product out there.
Best For: We generally do not recommend fee-based financial advisors as they may make recommendations based on how much commissions they will earn, rather than what’s best for you.
4. Commission-based financial planner
Commission-based financial advisors receive commissions for financial products that they recommend. This may seem like the cheaper option upfront, but they may not recommend the best products for you. If they start selling you whole life insurance, disability insurance, or annuities, be wary. There is a place for these products for some people, but you usually will want to work with someone who understands your big picture and has no conflict of interest.
Also, commission-based advisors are typically more limited in the products and funds they can recommend to their clients because their compensation is directly linked to the products they sell.
Cost: Vary depending on the investment, but the commission fee usually ranges from 3-6% on the products they sell.
What you get: Usually only an insurance or annuity product. They may also have you invest in a mutual fund that charges a 5% sales load and annual 12b-1 marketing fees.
Downside: Huge conflict of interest. Hidden fees. Products that may not be the best for your situation.
Best for: If you know the specific insurance product you need based on the recommendation by your main fiduciary financial advisor, then it can be good to work with a commission-based insurance agent. Otherwise, we generally do not recommend commission-based financial advisors as they may make recommendations based on how much commissions they will earn, rather than what’s best for you.
5. Hourly fees
Some financial advisors charge by the hour when giving financial planning advice. You will be charged for the total amount of hours spent. Some financial advisors may have an hourly minimum you must reach per session, such as three hours.
Cost: $200 – $400 per hour
What you get: Typically 2-3 meetings, where you receive financial advice. Ongoing financial planning support will be based on demand.
Downside: You may feel disincentivized to contact your financial advisor on an ongoing basis because you have to pay for each visit. This may result in you missing out on opportunities or new law requirements, or you may fail to consult your advisor on a key financial decision. Also, there are fewer financial advisors who do hourly work.
Best For: If you want to access a financial planner to help answer a couple of questions, an hourly-based financial advisor may be a good fit.
6. One-time fee
Some financial advisors charge a one-time fee for creating a financial plan for you. This will include recommendations on where to invest and how to save, but you will need to implement the plan yourself.
Cost: $2,000-$4,000 per plan
What you get: You receive a comprehensive financial plan.
Downside: No ongoing financial planning support. The plan is a static document, and cannot adjust based on your changing circumstances, new laws, or changing market conditions.
Best for: If you are looking for a financial plan but want to implement all of the recommendations yourself, consider paying a one-time fee.
Financial Advisor Cost Comparison
|Assets under management (AUM)
|The fee is based on a percent of the total investable assets of a client.
0.25% to 2% annually for total assets being managed
|A predetermined fee for comprehensive financial planning.
|$3,100 to $9,600 per year.
|A predetermined fee for comprehensive financial planning. The financial planner may also earn a commission on the financial product that they sell to their clients.
|$2,000 to $90,000 per annum.
|The financial planner earns a commission on the financial product that they sell to their clients.
|Varies on the investment but the commission typically ranges from 3-6% of the product that they sell
|The rate charged per hour. This is usually for a one-off project with no ongoing support.
|$200 to $400 per hour
|The rate charged for one financial plan. This is usually for a one-off financial plan with no ongoing support.
|$2,000 to $4,000 per plan
What about robo-advisors vs traditional financial advisors?
Robo advisors use automated algorithms to help clients manage their investment portfolios. They are usually less expensive than traditional financial advisors and charge between 0.25% and 0.50% of assets under management. However, they only offer automated services and are limited in scope. They also offer fewer investment fund options.
A robo-advisor creates a very basic investment portfolio based on a client’s answer to a risk tolerance questionnaire and when the client needs her money back. A traditional financial advisor takes into account every aspect of a client’s life to create a comprehensive financial plan. Robo advisors’ limitations could mean that clients miss out on thousands of dollars of missed opportunities.
Will Chat GBT replace human financial planners?
No. We do not expect Chat GBT to replace financial planners anytime soon. Financial planning involves complex decisions that require careful consideration and personalization.
A human financial advisor creates a holistic financial plan that takes into account your personal values, goals, and priorities. A financial plan should be comprehensive and collaborative. As you grow and change, your financial strategy should grow with you and take into account your updated situation. A one-off financial plan isn’t nearly as effective as an ongoing financial planning relationship.
Chat GBT may be able to give general financial advice, but it cannot understand your unique financial situation.
Where can I find information on a financial advisor’s fee schedule?
If you want to know how much a financial advisor charges, you can look at their Form ADV. Each fee type that the financial advisor charges for its investment advisory services will be clearly listed on that form (Part 2 Brochure, Item 5). Many financial advisors also list their fee schedules on their websites.
If you still have questions about a financial advisor’s fee schedule, feel free to ask them directly. They should be able to provide you with a clear explanation of their fees and how they are calculated. Here are some additional questions you can ask a financial advisor if you are currently seeking one.
Fee-Only vs Fee-Based vs Commission-Based Financial Advisors
|Is the financial advisor required to act as a fiduciary at all times?
|How are fees paid?
|Directly to the financial advisor ONLY
|Directly to financial advisors and from commissions, insurance products, and investment funds
|From commissions, insurance products, and investment funds
Are financial advisory fees tax deductible?
The Tax Cuts and Jobs Act (TCJA) eliminated the deductibility of financial advisor fees in 2017. Financial advisor fees are no longer tax deductible for tax years 2018 through 2025. Prior to the Act, financial advisor fees were deductible as miscellaneous itemized deductions on Schedule A of the tax return if they exceeded 2% of adjusted gross income.
There are still some specific situations in which financial advisor fees may be tax deductible. For example, if you incur financial advisor fees in the course of producing or managing income that is taxable, such as in a business or rental property, those fees may be deductible.
Additionally, financial advisor fees may be deductible if they are related to tax preparation or advice, or if you pay them as part of an investment in a tax-advantaged account, such as a traditional IRA or 401(k).
It’s important to consult with a qualified tax professional to determine the specific tax implications of financial advisor fees in your individual situation.
How much money should I have to hire a financial advisor?
There isn’t a specific amount of money that you should have to hire a financial advisor.
However, we do generally recommend that you meet one of the following criteria before hiring a financial advisor:
- You are saving $1,000/month or more
- You are making over $120,000 as an individual (or over $220,000 as a couple)
- You receive RSUs at work
- You have $200,000 or more in investable assets or cash
If you are just starting to accumulate savings, then it may not be worth hiring a financial planner. However, as you start to accumulate wealth and explore more complex financial decisions and investment strategies, hiring a financial advisor may be beneficial. Ultimately the decision is up to you. Speak to a fiduciary financial advisor about your unique situation to determine whether they can help you achieve your financial goals.
What am I paying for when I hire a financial advisor?
When you hire a financial advisor, you are paying for their expertise and guidance on a wide range of financial matters. Financial advisors can help you with your entire financial picture. They can provide personalized recommendations and investment strategies based on your unique situation and financial goals.
Before you decide to work with a particular financial advisor, make sure that you understand their fee structure and what services that fee includes. Some financial advisors may charge extra for some services. A financial advisor should be upfront about what they charge so if they give you the run around then you may want to steer clear.
Here at District Capital, we believe money is a tool to help you live your best life. We are a fee-only fiduciary financial planning firm. We offer comprehensive financial advice and investment management services for a set fee. There are no hidden costs and we never accept commissions. Our fees are very transparent and are published on our website.
Our financial planning annual advisory fee includes
- Written comprehensive financial plan
- Zoom meeting every four months, to discuss action items and new advice
- Unlimited email support
- Ongoing investment guidance
- Monthly newsletter
- Access to budgeting software
- Access to modern financial planning task tracker
- Access to our network of estate attorneys & tax professionals.
How do I know if I am being overcharged by a financial planner?
If you are concerned that you have been overcharged by a financial planner, here are some steps you can take to determine what a reasonable fee should be.
- Understand the fees: You need to calculate what fees you are being charged and how they are being calculated. If you have any concerns about the fees you are being charged, don’t be afraid to ask your financial planner for clarification. A good financial planner will be transparent about their fees and will be happy to answer your questions.
- Compare fees: Do some research and compare the fees you are being charged with those of other financial planners in your area.
- Review your account statements: Review your account statements to ensure that you understand the fees being charged and that they are consistent with the fee structure you agreed to. Look for any unexpected or excessive fees.
When should you fire a financial planner?
- When your advisor has not reached out to you in 12 months (It’s best practice to speak with a client at least once a year).
- When your advisor keeps talking down on you (Advisors need to have empathy and should be educating clients).
- When your advisor is putting most of your portfolio in high fees (Actively managed funds with high fees have been shown to underperform their benchmark over 90% of the time).
Is it worth paying for a financial advisor?
We are obviously biased, but we believe financial advisors are worth paying for. The benefits can significantly outweigh the cost. One study showed that financial advisors can potentially add about 3% in net returns each year. Another study published in the Journal of Financial Planning showed that those who had a comprehensive financial plan built up to four times more wealth than those with no plan.
If your financial planner can help you earn more each year than the fee they charge then it’s definitely worthwhile. Not only will they help you make more money, but they will also provide financial peace of mind and save you time trying to learn personal finance on your own.
Financial advisors typically have high retention rates, indicating that clients see the ongoing value of financial planning. We personally believe that working with a financial advisor and having a comprehensive financial plan in place is one of the best investments you can make for yourself, for your future self, and for your loved ones.
The ultimate decision about whether a financial advisor is worth your money or not will depend on your specific situation and the financial advisor that you choose. If they align with your goals, act in your best interest, listen to your needs, and work with people in a similar situation to yourself, then most likely they will be a good financial investment.
Work with a financial advisor to maximize your money in 2024
The cost of a financial advisor can vary depending on several factors, including their level of expertise, the scope of services provided, and the method of payment. Before choosing a financial advisor, it’s important to ask about their fees and how they are compensated. By understanding the total cost of working with a financial planner, you can make an informed decision about whether this investment is right for you.
If you are interested in a comprehensive financial plan, schedule a free discovery call with one of our fee-only financial advisors today.
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.