The old saying goes, “You have to spend money to make money.” And as it pertains to investments, that saying rings true for any number of reasons.
You have to use your money to invest—you can’t buy a stock with a smile. If you want to invest more efficiently, you would buy a fund, which requires you to let a manager skim a little off the top. And if you want personalized advice about your investments, you’ll typically have to pay a financial advisor.
Skilled, vetted financial advisors can not only help their clients substantially grow their wealth—they can optimize numerous facets of their financial lives, including budgeting, saving, taxes, retirement, and more.
That said, financial advisors do need to be paid. And while your first question might be “how much?” the next question out of your mouth should be “how?” That’s because there’s no uniform compensation structure—advisors are paid in a number of ways.
Today, let me lead you through the subject of how much financial advice costs and how financial advisors get paid. For each payment structure, I’ll address the pros, cons, and general “who is this best for?” to help you determine which payment method is best for you.
5 Ways to Pay a Financial Advisor
Financial advisors are paid either directly or indirectly by their clients.
When they’re paid directly, it’s through one of several different fee structures. Fees are often (but not always) taken directly out of the performance of your assets, though there are
When they’re paid indirectly, it means the client isn’t paying them—instead, they’re usually receiving commissions on products sold to their clients.
Each pay structure aligns differently with a client’s interests, so it’s important to understand how they work, and to work with an advisor that offers the fee structure you want.
Now, let’s move on to the various payment methods for financial advisors.
1. Percentage of Assets Under Management
Percentage of assets under management (AUM) is among the most popular financial advisor fee structures. “Assets under management” is the market value of the investments your financial advisor manages on your behalf. Advisors often charge fees as a percentage of that number. (For instance, if you had $100,000 in assets, and your advisor charged 1%, they would take $1,000 in fees annually.)
A 2023 AdvisoryHQ report shows that the average financial advisor fees for this structure typically fall between 0.59% to 1.18%, with an inverse relationship between AUM and fees—that is, the higher the AUM, the lower the percentage charged.
Why clients like this fee structure
- Percentage of AUM almost perfectly aligns the client’s and advisor’s interests. The advisor must continuously do well by the client (by growing assets under management) or their compensation will fall. Thus, the advisor is incentivized to stay hungry and always look out for ways to meet and exceed client expectations.
- Fees always come out of investment money, not out of pocket, so you don’t have to allocate additional budget for fees.
Why clients don’t like this fee structure
- Clients might face pushback if they attempt to liquidate a large chunk of their investment portfolio to, say, pay off debts and expenses, or make a major purchase. It’s a potential conflict of interest, as doing so might help the client, but it would also reduce AUM (and thus the advisor’s pay).
An additional consideration
- With percentage of AUM, the fee scales with the size of an investment portfolio. (For instance, 1% of $1 million in AUM is $10,000 in fees, 1% of $1.5 million in AUM is $15,000 in fees, etc.) This can be a pro or a con depending on your situation. It’s good because the fee will never be prohibitively expensive, no matter how small your account is. However, as your account grows, so too will the nominal dollar amount you’re paying in fees.
Bottom line: Do you benefit from this fee structure?
This fee structure is advantageous for most investors. It provides the best overall alignment of client and advisor interest: Both benefit from growth in the portfolio, and both suffer from losses. The scalable nature of the fee keeps it affordable for all investors. And while an advisor might try to push back a little on a client’s request to liquidate a meaningful portion of their portfolio, the client ultimately has the final say—so that drawback is an annoyance, but nothing more.
Investors with extremely high AUM, who are very cost-conscious, might look elsewhere … but might not like what they find. If a financial advisor charged 1% of assets under management, a client with a $1 million portfolio would pay $10,000 for advice/management. A client with a $100 million portfolio would pay $1 million—or $990,000 more. That high-AUM client could almost certainly find a flat-fee advisor who will manage their money for a smaller nominal sum. But it’s also possible they wouldn’t receive as high a level of service and customization.
Related: Don’t Make These 7 Mistakes When Choosing a Financial Advisor
2. Flat Rate Per Period (Recurring Fees)
Financial advisors who charge a flat rate per period may be paid monthly, quarterly, or annually, depending on your agreement.
The fee doesn’t dynamically change based on the value of your investment portfolio. However, at least broadly, higher assets will likely translate to a higher fee. That’s in part because higher assets typically allow for a more complex portfolio, which means more work on the part of the advisor.
Your annual financial advisor costs within this structure can vary substantially, from a couple thousand dollars into the tens of thousands of dollars.
Why clients like this fee structure
- You know exactly how much you’ll be paying.
- Clients are less likely to face pushback if they attempt to lower the value of their investment portfolio held with an advisor, removing a potential conflict of interest.
Why clients don’t like this fee structure
- Clients with small account balances will end up paying a higher fee as a percentage of their portfolio’s value for financial advice.
- This fee is typically paid out of pocket, not taken out of investment assets, so you must budget additional money to pay the fee.
An additional consideration
- As you accumulate assets in your portfolio, your advisor won’t necessarily earn additional income from those new assets since the fee you pay is fixed. However, higher assets under management can entail more complex investment decision-making and thus potentially higher flat rate fees.
Bottom line: Do you benefit from this fee structure?
A flat rate fee structure is ideal for individuals with larger account balances—from a pure cost perspective. However, an advisor isn’t incentivized to go above and beyond if the fee structure doesn’t match the assets managed by the advisor.
Related: 11 Retirement Planning Mistakes to Avoid
3. Hourly Fees
Maybe you only need an annual financial planning meeting. Maybe you want at least an hour a week of undivided financial attention. No matter your situation, with hourly rates, you pay only for the time you need—no more, no less.
Financial advisors’ hourly fees typically land between $120 and $400 per hour. While the hourly fee itself won’t necessarily budge based on your assets under management, the loose connection between portfolio size and investment complexity could mean that you pay more (in the form of more hours needed) if you have a larger portfolio to be managed.
Let’s say your advisor spends about 12 hours over the course of the year updating your financial plan and giving you investment advice. If the advisor charges $300 per hour, that would amount to $3,600 per year.
Why clients like this fee structure
- You only pay for the time and work you need. While the hours required to service your portfolio might grow a little as your assets increase over time, your costs should only grow a little bit even if your assets enjoy rapid growth.
Why clients don’t like this fee structure
- Anyone who needs a high amount of attention and ongoing investment management might pay more over time with this payment structure.
- This fee is typically paid out of pocket, not taken out of investment assets, so you must budget additional money to pay the fee.
Additional considerations
- Financial advisors’ hourly fees can vary based on a number of factors, such as certifications and level of experience, meaning a $100-per-hour advisor might not have as much experience as a $300-per-hour advisor.
- This payment structure is popular among advisors offering estate planning advice, tax help, and debt management.
Bottom line: Do you benefit from this fee structure?
This fee structure may benefit investors looking to only temporarily work with a financial advisor, as well as investors with low AUM who might not be able to attract advisors who work on a percentage-of-AUM fee structure. However, this could be one of the more expensive options, especially for clients who require ongoing investment management.
Related: Budgeting in Retirement: Our Step-by-Step Guide
4. One-Time Fees
You might only need help navigating a major life event, such as a divorce or death of a spouse. Or you might just want a Certified Financial Planner™ to help you create a comprehensive financial plan you can carry out yourself.
In this case, rather than ongoing financial advisor costs, you’ll likely pay a one-time fee. A one-time financial advisor fee will vary depending on the service, but will often land between $1,000 and $3,000.
Why clients like this fee structure
- This payment method is transparent and easy to understand.
- You aren’t locked into any ongoing fees.
- Clients can always approach financial advisors again if they need additional financial planning help in the future.
Why clients don’t like this fee structure
- Clients don’t have an advisor ready if they need investment advice or have other questions.
- One’s financial plan is meant to be reviewed and adjusted regularly, so clients may want additional help in the future.
- While they could schedule another appointment, financial advisors’ schedules fill up and they may not have availability.
- This fee is typically paid out of pocket, not taken out of investment assets, so you must budget additional money to pay the fee.
An additional consideration
- In the event the market changes drastically or a person’s financial goals change, the financial plan may not be as helpful as it was when it was originally drawn out.
Bottom line: Do you benefit from this fee structure?
Clients who only need a customized plan for a specific one-time event, such as buying a house, are a great fit for this type of financial advisor fee. However, one-time fees don’t make any sense for people who need ongoing financial planning services.
Related: How Much to Save for Retirement by Age Group [Get on Track]
5. Commission-Based Products
Some financial advisors are paid through commissions on the investments they buy for or recommend to clients. How much they earn varies by investment.
Let’s use one of the most common examples: a mutual fund. Mutual funds have multiple ways of paying an advisor, such as through ongoing trailer fees and initial sales commissions. There’s also the “sales load.” This one-time fee is taken upfront from the initial investment, and it typically ranges between 3% and 6% of the initial investment. So, let’s say you buy $100,000 worth of a mutual fund with a 5% front-end load, you would actually end up investing $95,000 in the mutual fund, with the other $5,000 immediately extracted as a fee.
This frequently is referred to as an “indirect” fee, but that’s only because the client is paying the mutual fund, who then issues a commission that eventually passes to the advisor (vs. the client paying the advisor directly). Nonetheless, this fee comes directly out of your investment funds, and it does so right out of the gate, which means that share of money is never invested.
Why clients like this fee structure
- Fees always come out of investment money, not out of pocket, so you don’t have to allocate additional budget for fees.
Why clients don’t like this fee structure
- This fee structure inherently creates a conflict of interest between a client and their advisor. When an advisor recommends one of these products, it might be a suitable investment, but it might not serve as the best fit for your needs—the best fits for you might have less favorable commission potential to the advisor.
An additional consideration
- This type of fee usually only covers investment management. It likely will not help you pay for more comprehensive financial services.
Bottom line: Do you benefit from this fee structure?
Anyone can technically perform well under this fee structure, but it’s also the most problematic. There is no required alignment of client and advisor incentives, creating a built-in conflict of interest.
Related: 11 Ways to Avoid Taxes on Social Security Benefits
What About Robo-Advisory Services?
Rather than traditional financial advisors, some people use a robo-advisor.
Robo-advisors are computer-based online financial planning services that use algorithms to manage your investments. A robo-advisor is generally cheaper than a human advisor.
Often they operate on a percentage of AUM model, but some also offer direct access to human financial planners. However, the ability to converse with real people typically requires a higher minimum balance, higher percentage of AUM fees, a fixed rate for that service, or some combination thereof.
Although this can be a more affordable option, your financial advice and management aren’t customized to your situation like it is when you use human advisors.
Bottom Line: Here’s Why a Financial Advisor’s Fee Structure Matters
Whether you know you’re ready to work with an advisor or still asking yourself, “Do I need a financial advisor?” it’s essential to know the minimum amount you’ll need to work with a financial advisor, and you’ll also need to know how much and how you’ll pay.
Traditional financial advisors typically charge a percentage of AUM, an hourly or recurring fixed fee, a one-time fee, or are paid through commissions.
Depending on your needs, percentage of AUM or other direct fee structures have their places. But it’s difficult to recommend commission-based advisors for most investors. Because the fee structure impacts your overall earnings, this is an important factor when choosing a financial advisor. If you’re screening potential advisors, always raise this subject.
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