Derek Burnett
Derek Burnett is a Contributing Writer at Bottom Line Personal, where he writes frequently on health and wellness. He is also a contributing editor with Reader’s Digest magazine.
A major consideration in your decision to hire a financial advisor is the question of what fees you’ll be expected to pay. In short how much do financial advisors cost? Because “financial advisor” is such a broad term, people falling under that umbrella operate under a few different compensation models. The most common payment arrangements are no-fee, hourly, commission-only, fee-only, and fee-and-commission.
Because they’re supported by nonprofit organizations, most credit counselors charge no money for the help they offer, nor do they earn any commissions for their work. If all you need is some help managing your debt and setting up a budget, a credit counseling service can be a great way to enlist an expert without worrying about how you’re going to pay for it. Unfortunately, the guidance offered by a credit counselor is not nearly as comprehensive as that provided by Certified Financial Planners, Registered Investment Advisors, or other professionals. A nonprofit credit counselor will likely not be able to devote as much one-on-one time to you as would other types of advisors. Often, their services are provided mainly as group classes. Some are able to meet with you one-on-one for a single session, while others can do monthly meetings, usually for a relatively short period of time.
Financial therapists and financial coaches may choose to bill by the hour. Expect to pay between $100 and $800 per session with a financial therapist. The fees for financial coaches also vary widely, ranging from $75 to $600 per hour. Some coaches also structure their compensation around “packages” that may approach $6,000 per year.
Other types of financial professionals offering comprehensive advisory or one-off services may also choose to bill hourly. Credentialed advisors offering a full suite of services may charge between $150 and $400 per hour.
How are financial advisors paid under the commission-only model? Generally speaking, such professionals charge no money up front but receive commissions for products or securities they buy or sell on your behalf. The ways those fees are structured usually depends both on the advisor and on the type of product being sold. For example, on investment products, a commission-based advisor may take somewhere between 3% and 6% of its value. On annuities, commissions may fall anywhere between 1% and 8%, and for life insurance, advisors take a relatively large percentage of the first year’s premium (Anywhere from 40% to 90% is common) and smaller percentages for the next few years.
When you hire a fee-only advisor, their pay never comes from commissions on products they sell you. Some charge pre-established flat fees, while others charge a percentage (often 1%) of the value of your investment assets that are under their management. (There is some debate as to whether such asset-based fee structures should be considered fee-only, since an advisor who is paid commensurate to the amount you’ve invested is incentivized to get you to invest more assets, an arrangement that compromises the no-conflict spirit of the term “fee-only”). Under non-asset-based fee structures, it’s typical to pay between $1,200 and $3,000 to set up a financial plan, and anywhere from $1,500 to $7,000 for a year’s worth of services. Fee-only advisors are fiduciaries, meaning that they are legally and ethically bound to act in your financial best interest. More and more advisors are moving to a fee-only model, arguing that they offer pricing transparency and are not incentivized to sell you products that might not be a good fit.
Some financial advisors charge both a base fee and commissions on certain products.
Each of these compensation models has advantages and drawbacks. For example, everyone loves the word “free,” but, as stated, nonprofit services offered at no charge tend to be limited.
At first glance, a fee-only model would seem preferable to one in which your advisor receives a commission for selling to you. After all, do you want your advisor’s decisions to be based on the prospect of making you rich, or on making him rich? And wouldn’t you rather have a clear-cut fee rather than a murky arrangement whereby the advisor is paid a cut behind closed doors?
Unfortunately, the fee-only-versus-commission debate is not as simple as it sounds. The fee-only model has its own potential drawbacks. First, the amount charged by fee-only advisors may put such professionals beyond the financial reach of people of modest means. Second, working with a fee-only advisor doesn’t necessarily help you avoid paying commissions altogether. If your fee-only advisor believes it is in your best interest to purchase a product or make an investment on which a commission is charged, you still must pay that commission—just to a stranger who deals in that product, not to your trusted advisor who you may have liked to compensate. And because a fee-only advisor may not deal in commission-based products, their offering may be limited compared to that of a commission-only advisor.
Another drawback to the fee-only model is that, although acting as your fiduciary, your advisor may not be particularly interested in growing your portfolio. They’re getting paid the same fee whether your finances flourish or not (The exception, of course, is those advisors referring to themselves as fee-only while charging based on the value of your assets invested). While many proponents of the fee-only model might chafe at that idea, it remains the case that a commission-based advisor has a financial, not merely ethical, motivation for you to thrive.
So does that mean that commission-only is best? Not necessarily. The arguments about transparency and conflict of interest are legitimate. At some firms, advisors may be pressured to push their own companies’ products on clients even when they aren’t the best fit. Commission-only advisors are not held to a fiduciary standard. Instead, they may sell products that meet the much lower threshold of being “suitable” to their clients, which leaves a lot of room for guidance that is minimally acceptable but not in the true best interest of the customer. And even though you don’t immediately feel the sting of the commission at the moment you purchase an investment product, the percentage is taken out of your investment, such that your return will later be lower.
In the end, the best arrangement is the one that suits you and with which you feel most comfortable. When you’re looking around for an advisor, ask as many questions as you like as to exactly how they get compensated. If they’re not willing to be open about this with a prospective client, that’s a good indication that you shouldn’t be working with them.
