How Much Does An Advisor Cost? Typical Financial Advisor Fees Explained

Any business must justify its value. Clients hire companies or buy products to save them time, money, pain, and frustration. The value of these things isn’t always monetary.

Value is in the eye of the beholder when determining a fair price. There is a big debate in the financial services industry regarding different business models and if an advisor can justify their fees.

The financial planning industry as a whole isn’t doing itself any favors due to its checkered past and the different ways advisors get paid. On top of that, there is no clear definition of a financial advisor.

An advisor can be an insurance agent who only sells life insurance or disability insurance, a stockbroker, or an investment advisor. They can all be paid in a different manner. This only adds to the confusion.

To answer why financial advisors charge a fee, I want to discuss the value of an advisor and examine the value they bring.

How Much Does a Financial Planner Cost?

Financial Planning and Hourly Fees for Advisors

Financial planners can bill their clients in various ways. Similar to law firms or accounting firms they can charge retainers, hourly, or financial planning fees. The complexity and time will dictate the cost of the engagement. Typically. advisors are charging $100 to $350 per hour and anywhere from $1,500 to $10,000 per financial plan.

Advisors who charge on an hourly basis are likely only giving ad-hoc advice for a single issue such as a portfolio review. Financial plans will entail a comprehensive review of an individual financial situation and provide recommendations based on their goals. This review will consist of anything related to personal finance like cash flow, insurance, retirement, investments, taxes, and estate planning.

What Percentage Do Advisors Charge?

The most popular method of billing is a fee for assets under management. Some advisors will charge separately for financial planning and investment management while others will include the planning with the investment management fee.

The fee is usually a percentage of assets under management. This ranges from 0.10% to 1.25% depending on the size of the portfolio. Usually, there are tiers or breakpoints in the advisor’s fee schedule which bring the fee down the larger the portfolio becomes.

How Does An Advisor Show Their Value?

Investment Philosophy

A lot of financial planner colleagues, myself included, believe in a buy-and-hold approach, global diversification, keeping costs, and minimizing taxes in an investment portfolio.

It is very difficult to beat the market consistently year over year without taking on substantially more risk.

Certain asset classes have shown to outperform the market over time such as value, small-cap, and highly profitable companies.

Outperformance is more likely to happen over long periods of time such as multiple decades. Anything can happen year to year, so comparing returns over a 3 or 5 year period is not enough data in my opinion to shed light on better performance.

Other professionals have an opposite point of view and that’s totally okay. There are countless strategies and ways you can make money in the market.

Financial Planning and Taxes

The reality is that investment management is only one piece of the puzzle. A good advisor will analyze someone’s entire financial picture and get the right professionals involved when needed.

This includes cash flow, debt, retirement, insurance, investments, taxes and estate planning to name a few areas.

Tax planning presents a MASSIVE opportunity for advisors to provide value.

The tax code is extremely complex and convoluted. People often make mistakes in this area by not taking advantage of all the deductions available to them, not setting up their business entity properly, not understanding how their income is taxed, or not understanding the different features of retirement plans to allow them to save and invest the most money. The list goes on and on.

Investment returns only get you so far once you reach a certain level of income in comparison to tax savings. If you can get creative around tax planning, the savings can be substantial for high-income individuals.

Time, Interest, and Behavior

People need the service and appreciate the advice. Half the battle is getting people to take action and create behavior change. It’s about getting organized and creating a plan.

A lot of people just aren’t interested or don’t have the time to manage their finances, let alone an investment portfolio, on their own.

Facilitating behavior change can be encouraging people to save more money or getting an agreement to make changes to their portfolio. It’s not all about maximizing returns and swinging for the fences.

It’s about managing risk and accomplishing your goals.

You don’t know what you don’t know and having someone on your side to offering an objective point of view and asking the right questions can be very valuable.

Example 1:

A hypothetical example is an individual who is very financially conservative and is holding on to multiple six figures in cash.

If this is well above their need for cash, but for some reason or another they have a mental block around investing it or only view their retirement accounts as assets to invest in, this creates a huge opportunity cost.

If I can help them think through their goals and get them to invest the money appropriately this could add hundreds of thousands of dollars to their portfolio over time. That is very material to someone’s livelihood or legacy.

Example 2:

Another example would be encouraging people to stay in the market. The market crash last year at the start of COVID is a perfect example of this. If people pulled out at the bottom, they missed out on a positive 20% return or so by year-end depending on what asset classes you look at.

If you have seven figures invested that’s at least $200k by staying the course. It’s easy to dismiss this aspect of investing if you understand markets and have a high-risk tolerance. However, the emotional part during a market decline is very real to a lot of people and they struggle to handle it, regardless of logic.

Alternatively, if you helped someone invest cash on the sidelines at the bottom last year they could be up roughly 40%. Again, it’s about behavior change and getting a plan together.

Business Model

The industry norm is charging a fee for assets under management such as 1%, but there are other business models like monthly subscription fees or hourly.

At the end of the day, everyone has to get paid. It’s just figuring out the best way to do so and what is going to be the best for clients.

If you’d like an objective second opinion about your finances, please contact Michael Shea, a CERTIFIED FINANCIAL PLANNER™, at Applied Capital. Email him at [email protected] or fill out a contact form.

This blog is provided for informational purposes only. Such views are subject to change at any point without notice. The information in the blog should not be considered investment or tax advice or a recommendation to buy or sell any types of securities. Some of our blogs or information therein have been obtained from third party sources believed to be reliable but such information is not guaranteed. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. No reliance should be placed on, and no guarantee should be assumed from, any such statements or forecasts when making any investment decision.

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