I never get tired of answering users’ questions. Or, at least, that’s what I keep telling myself, in the hope that it will eventually become true. Today, Katie G. wants to know about the average financial advisor fee. How much is too much?
Well, Katie, I’ve answered this question before, like in my posts:
- The true cost of a financial advisor
- How much do financial advisors charge?
- Financial advisor rates: the surprising truth
- Typical financial advisor fees
In fact, you can find all of the Top Financial Advisor posts relating to average financial advisor fees on the “pricing” category page.
Of course, with that out of my way, in my benevolence, I will once again answer this question.
Types of Financial Advisors
The question “What is the average financial advisor fee?” is impossible to answer without more information, because there are several different ways in which financial advisors charge, as I’ve covered in my post on the types of financial advisors. To recap, there are three main types of financial advisor (at least when it comes to fee structure):
- Percentage-based financial advisors: Percentage-based financial advisors will manage your money for an annual cut of your assets. Typically, they will charge 1% each year — the idea being that the return on your investment will be at least 1% higher with your money under their care. As I’ve gone over in the past, I like percentage-based financial advisors because their incentives are mostly aligned with yours: when you make money, the make (more) money. Unfortunately, when you consider the cumulative return on that missing 1%, it can add up to a quarter of a million dollars or more.
- Fee-based and fee-only financial advisors: Fee-based and fee-only advisors typically charge an hourly rate. I like to compare these types to lawyers, given that they charge in much the same way. The downside of a fee-only advisor is that they don’t do any better compensation-wise when you make a larger return but, given that their “total cost” (taking into account returns on investment) is lower, they’re a good choice if you want to take a more active approach to managing your own money — active in the sense that you’re the one in control, not that you necessarily make many trades.
- Commission-based financial advisors: Commission-based financial advisors earn a cut of everything that they convince you to buy — this is often not obvious, fee-based advisors, for instance, will earn both a commission and charge an hourly rate. Unfortunately, this means that a commission-based financial advisor, first and foremost, wants to sell you something, whether or not you need it. This is, after all, how they’re compensated.
Average Financial Advisor Fees by Type of Advisor
Okay, then, there are two main types of financial advisors that you should consider: percentage-based financial advisors and fee-only financial advisors. What kind of average financial advisor fee can you expect?
- The industry standard, when it comes to percentage-based financial advisors, is to charge 1% of a client’s assets each year.
- Fee-only advisors typically charge an hourly rate of 150 to 300 dollars per hour, but some will charge by the project or per financial plan. You may also end up paying a retainer fee.
In general, I would not pay much more than 150 to 300 dollars an hour for a fee-only advisor, and I definitely would not pay a percentage-based advisor more than 1% of my assets annually.
Indeed, as I’ve mentioned before, there are several services out there where you can get most of the value for much less than 1% of assets annually:
- Wealthfront charges .25% annually.
- For accounts with 100k+, a Betterment account costs only .15% of assets annually.
- And Vanguard offers a service for .30%.
Of course, given how investment returns build up over time, this can end up being a lot of money, in some instances a quarter of a million dollars or more (see my post on the true cost of a financial advisor for more detail on this), so the best solution is to educate yourself. Take charge of your own finances! You can do it.