One of the first questions people ask me about financial advising — once they’re convinced that, yes, they could use my services — is, “How much can I expect to pay? What does it cost? What are typical financial advisor rates?”
Of course, a complete classification of financial advisor rates would be as complicated as the periodic table. Wait, scratch that. It would probably be even more complicated. Humans tend towards greater complexity than any physical system, and financial advising covers a huge range of human activities.
But that doesn’t mean that we can’t say anything about financial advisor rates. These rates generally fall into 4 different categories, depending on how the advisor charges.
- Commission-Based Advisors: Commission-based advisors make money by selling you something. Consider, for instance, someone who sells life-insurance. In general, these people get some cut of the profit of everything they sell. As a result, how they make money can be less than obvious. They may give away their services for “free,” with financial advisor rates of essentially zero. Unfortunately, this means that a commission-based advisor (such as a broker) won’t have your best interests in mind. She makes money when she sells you something, not when she makes you money.
- Fee-Only Advisors: Fee-based advisors make money by charging clients a fee. Typically, they will have flat financial advisor rates. This is very reminiscent of how you might be billed by a lawyer: x dollars per hour. Generally, fee-only advisors have no reason to persuade you to buy something, an advantage over commission-based advisors, but they still have a limited incentive to make you money. Generally, fee-only advisors are the right choice if you need a few hours of an expert’s time, perhaps to rebalance your portfolio.
- Percentage-Based Advisors: The most popular fee-structure, when it comes to financial advising rates, is to charge clients a flat percentage. The industry standard is 1%. Thus, for a client with 200,000 in savings, a financial advisor would charge a yearly fee of 2,000 dollars (or 1%). This is also my preferred fee structure, for the simple reason that the incentives match up. When you make money, your advisor makes money. This is a powerful advantage over those who charge a flat fee and commission-based advisors.
- Combination Advisors: Finally, combination advisors make money both by charging client a fee and via commissions on different sales. As their name suggests, they’re some combination of the above three. Note that there is a difference between fee-only advisors and fee-based advisors: fee-based advisors also make commission money. Fee-only advisors don’t.
Which type of financial advisor is right for me?
As I mentioned above, as a general heuristic, look for a financial advisor that will be successful when you’re successful. By tying your fates together, you ensure that they will actually have your best interest in mind. (Squawk all you want about fiduciary duty — that’s just not how humans work.)
Percentage-based advisors are usually the best choice. You pay based on the amount of assets you want managed and, if your portfolio grows, so does the advisor’s absolute income. The best things for you are also the best things for them.
Fee-based advisors, too, can an excellent choice, especially if you already have some explicit goal in mind. If you want to, say, diversify your assets, you could pay an advisor a one-time fee to get it done for you. While this is more hands on, you’ll avoid paying out a yearly fee and, instead, will only have to deal with an advisor when you really need their services. (Thus, you’ll get all of the value, without paying recurring financial advisor rates.)
This illustrates a general principle: the best person to manage your money is you. You are the only one that really has your best interests in mind. Plus, you charge yourself the lowest financial advisor rates, so that’s a bonus. Like Ben Franklin said on the financial advising quotes page, “An investment in knowledge pays the best interest.” And this 10x more true for financial knowledge.
Avoid commission-based advisors. They don’t have your financial well-being in mind. It’s not a priority. They are just trying to sell you stuff, whatever it may be. Of course your broker wants you to move your stock around: that’s how they make their money. Remember Warren Buffet’s Fourth Law of Motion? “For investors as a whole, returns decrease as motion increases.“
Don’t believe me? Take it from commenter Andrew:
I am a licensed broker and manage a few accounts. While I do enjoy this responsibility and want to do my best for my clients, I am bothered by the conflict of interest that comes from being paid by commissions. There is no direct financial incentive to manage the account well.
This is his job and he’s willing to admit that he’s bothered by the conflict of interest.
In fact, here’s one way you can put this knowledge to work in your life right now: Have you ever noticed that most book reviews are positive? They are, and it’s not because most books are great, but because most book reviewers have some sort of stake in the book selling — maybe via an affiliate program or because their parent company is somehow invested in the book. Book reviews published in places like The New York Times are often not so much reviews, but sales pages.
Financial advisor rates: hourly
What sort of hourly rates can you expect to pay a financial advisor? Well, as I mentioned above, really only fee-based and combination advisors will charge you financial advisor rates on an hourly basis but, in general, you’re going to be paying in the range of 150 to 350 dollars an hour. There is some variance, but these are pretty standard industry-wide fees.
Again, these are the best value if you’re seeking targeted advice. If you know what you need help with, fee-only advising can be the way to go. Your relationship with a fee-only advisor will not typically be ongoing, so if you want someone to watch over your money long-term, look elsewhere.
Keep in mind: Fee-only advisors will be relatively new to the field. Most non-junior advisors shift to different fee structures, given that they’re more lucrative. Be prepared to do some digging to find someone fee-only with significant experience.
If there is a specific firm that you’re interested in, and the firm is a Registered Investment Advisor (or RIA), they must file an ADV Part II, with either the SEC or the state they operate in. You can search for and find more information on firms with the IAPD’s database.
Financial advisors can be group into 4 different classes, all of which charge different sorts of fees. The most common type of management is a percentage-based advisor. Typically, these people actively watch your money, and charge 1% per year.
If that’s not what you’re looking for, the second best option is a fee-only advisor. The financial advisor rates of this type are similar to those of lawyers: they charge an hourly fee, which can be in the range of 150 to 350 dollars an hour. If you have a specific need or require targeted advice, these are your best bet. Keep in mind, though, that it can be difficult to find a fee-only advisor with a lot of experience, as most advisors move on from fee-only advising when they become more established.
In general, you want to stick to these two types, and avoid commission-based advisors, as they’re paid on the amount that they sell to you, not according to the amount they help you. (Though, as a result, they will have the lowest upfront financial advisor rates — sometimes even zero.)
That’s what you need to know about financial advisor rates. Hopefully I’ve managed to make this simpler than the periodic table.