How much do financial advisors charge?
Types of financial advisors
When there is on word for something, people mistakenly assume that all of the things captured by that word are the same. Like intelligence. It’s a good bet that intelligence is not one thing, but many separate things that happen to share a word.
Like financial advisor. Like I pointed out in my post on how much financial advisors earn in South Africa, financial advising is broad. Very broad. The field is huge. On the one side, you have financial advisors that deal with helping people out of debt.
On the other side? You have people who deal with business finances, or analyze investment properties. All of these can fall under the term “financial advisor.”
So, it should come as no surprise, that there’s not one type of financial advisor, but at least three. I’ve covered this before in my post on the different types of financial advisors.
In fact, I’ve covered this many times before, in:
- Typical Financial Advisor Fees
- Financial Advisor Rates: The Surprising Truth
- The True Cost of a Financial Advisor
- What Does A Financial Advisor Do? An In-Depth Look
But, hey, what the hell, right? Why not cover it again?
There are three major types of financial advisors, at least when it comes to how they charge. They are:
- Commission-based financial advisors: Commission-based financial advisors are sort of a boogeyman. They make money each time they sell you something (like life insurance or an annuity), which means that they might be willing to dispense financial “advice” for free — but, really, they’re not so much advisors as they are salesman. I recommend staying away from this type of advisor.
- Fee-only and fee-based financial advisors: Fee-only advisors charge an hourly fee for dispensing financial advice, and this is the only way that they’re compensated, much like a lawyer would charge. Fee-based advisors charge both an hourly fee and may also make money based on commission. As I’ve gone over before, fee-only and fee-based advisors are a good choice if you want to be active in the management of your own money. Otherwise, you’re probably looking for a percentage-based financial advisor (or a “money manager”).
- Percentage-based financial advisors: Percentage-based financial advisors will manage your money, for a cut of your assets each year, typically 1%. I’ve argued in the past that this is a fair rate, but I’ve changed my mind since then. See my updated thinking below.
How much financial advisors charge
Okay, so, when it comes to a fee-only or a fee-based financial advisor, you can expect to pay in the range of 150 to 300 dollars an hour. Some websites argue that up to 500 an hour is a reasonable price — I don’t think so. Maybe if the financial advisor is Warren Buffet and, hey, even if it Warren Buffet, you can get that advice on my page of financial advising quotes, for free.
Great deal, right? I thought so.
On the other hand, when it comes to percentage-based financial advisors, the industry standard is typically a 1% cut of assets each year. The justification for this is that most financial advisors believe that they create at least 1% of surplus value for their advisees each year.
But, like I pointed out in my post on the true cost of a financial advisor, this 1% can be misleading — an extra 1%, after taking into account compounded returns, could end up being a quarter of a million dollars or more.
Luckily, there are some cheaper tools out there, including:
- Of course, the best and cheapest way to manage your finances is to learn to do it yourself.
- A Wealthfront account will cost you .25%
- And a Betterment account costs only .15%, for accounts of 100k or more.
- Plus, Vanguard offers a service for .30%.
All together, then, the answer to the question, “How much do financial advisors charge?” is:
- For a fee-based or fee-only advisor, between 150 and 300 dollars an hour.
- For a percentage-based advisor, between .15% and 1% of assets annually.