How Much Does A Financial Advisor Cost?
This can be a complicated question because the Advisor business has several different business models that all charge you money in a slightly different manner.
In order to truly understand how much you are paying and what you are getting for that cost, you need to at least be familiar with the four main options available to you.
So, let me explain the 4 different business models, how they charge, and then specifically how much I charge to work with you and why it’s a bit different. Let us begin.
The Four Financial Advisor Business Models And How They Charge You.
The Stock Broker: The Stock Broker business model is one where the Advisor does not charge you any fees at all, and simply gets paid a commission for selling you a particular investment.
Some Examples:
- Mutual Fund / A Shares: Product may charge a Front end load of 3.75% to 5.75% on Average* as an upfront off the top charge in addition to annual management fees of about 1.44% per year**
- Variable Annuities: Typically don’t carry a front end charge but in addition to annual management fees usually around 1% they may also charge a Surrender Charge of 6% or higher decreasing over a period of years if you take all of your money out.
- Mortality and Expense Fees: Most Variable annuities also charge a fee for Life Insurance that can tack on an additional 1% per year or more on top of the other mentioned fees.
The higher these product fees are the more the companies who issue them can afford to pay the Stock Broker to sell them to you.
But with these fees also come certain benefits like professional money management, life insurance benefits, and even guaranteed income that would not be available without these fees.
The Insurance Agent: The Insurance agent business model works very similarly to the Stock Broker Model above. The Insurance agent Advisor does not charge you ANY fees at all and simply gets paid a commission for selling you a particular Insurance Product.
Some Examples:
- Fixed Annuities: Most have a back end surrender charge that decreases over a period of years. You only pay this charge if you take all of your money out early or withdraw more than the allowed percentage in a given year. Typically you have access to 10% without a fee.
- NOTE: Unlike Variable Annuities Fixed Annuities typically don’t have ANY front end or ongoing annual management fees or life insurance costs built in.
- Life Insurance: Most life insurance plans charge Front end fees and back end fees as well as ongoing costs to cover the charge for the death benefits.
Much like the Stock Broker model, the higher these product fees are the more the companies who issue them can afford to pay the Insurance Agent to sell them to you.
But with these fees also come certain benefits like, the safety of principal, leveraged insurance benefits if you pass away early or end up in a nursing home, as well as some tax advantages that are just not available in non-insurance products.
The Fee-Only Advisor: A Fee-only Advisor business model is one where the Advisor charges a fee for advice or for managing money.
Some Fee-Only Advisors charge a planning fee or an upfront lump sum charge ranging on average from about $1,500 to $2,500 or more to develop a Full Financial Plan.***
In addition to an upfront planning fee, most Fee-Only Advisors also charge a money management fee of about 1.00% to 1.75% of the total assets managed.
The management fee would be deducted from your investment balance on a monthly or quarterly basis.
While this could sound expensive to some, keep in mind the Fee-Only Advisor is NOT getting paid ANY commissions for selling you products and this fee is often being split with a professional money management team that is all working to optimize results.
Is Fee-Only Advice More Objective Advice?
Some people assume that because a Fee-Only advisor does not get paid any commissions or finder’s fee that their advice must be more objective. In reality, their advice can be equally swayed.
Here is an example of a potential conflict of interest: If you asked your Fee-Only Advisor about purchasing a Fixed or Indexed Annuity from an Insurance Agent Advisor you would expect to get objective advice. Or would you?
For you to purchase that Annuity would require that you remove money from your assets that the Fee-Only Advisor is getting paid to manage. Might they prefer that you continue to leave your money in their care so they can continue to charge you their ongoing fee on that money?
In my opinion, there is the SAME room for conflicts of interest no matter how someone is getting paid so you really need to understand all of your options and do what you feel is right for you.
The Hybrid Advisor: A Hybrid Advisor is a business model that is a blend of two or more of the business models above. (as if this wasn’t confusing enough!)
For example, some Fee-Only Advisors chose to also offer products only available through a Stock Broker arrangement. If this is the case they will normally refer to themselves as a Fee-Based Advisor instead of a Fee-Only advisor.
Because these terms sound so closely linked it is very easy for a layperson to get confused as to who they are actually dealing with.
If a Hybrid Advisor does sell you a product he or she is getting paid a commission on they are supposed to disclose this to you in advance of the sale as this could be a conflict of interest.
How Much Does it Cost To Work With Me?
I operate as a Fee-Based Advisor under a Hybrid business model.
My particular model blends what I believe to be the best of two worlds. On one hand, I operate as a Fee-Based Advisor offering investment advice for a fee, but on the other hand, I am also licensed to represent insurance companies and collect a finder’s fee.
I can be compensated in a variety of ways, based on the individual’s situation:
- I charge a small up-front planning fee to run analysis and develop a full financial plan.
- For the money that belongs in the stock market, I get paid a % to help you manage that money. Typically we charge around 1.10 to 1.65% per year collected on a monthly basis out of the account being managed. You never write a check to me personally or to my business.
- For money better suited for an insurance company solution, I get paid a finder’s fee from the insurance company and no ongoing money management fees are charged.
This Model Could Save You Money If It’s a Fit.
In the long run, this can typically save my clients thousands of dollars.
How? You only pay management fees on the portion of the money that is invested in the market.
For example, it would cost a lot less per year to pay 1.5% on only the 75% of your assets that are invested in the Stock Market (as an example, Percentages vary per client’s needs) instead of paying a 1.5% management fee on 100% of your investments.
Of course, there are pros and cons to every approach.
Some would argue that fixed insurance products don’t grow as fast so that is a hidden cost.
I would refute that by saying not all of your money should have the goal of fast growth and that insurance companies can offer a layer of protection and security that can be crucial for many pre-retirees.
Did that help?
I know all this talk of fees can be confusing, but making sure you are not paying more than necessary for good financial advice is important.
Hopefully learning about these different business models will help you to better discern which type of advisor is going to be the best fit to work with you.
P.S. If you haven’t checked it out yet, please stop by my mini online seminar How Retirees and Pre-Retirees Can Potentially Avoid Going Broke While Keeping Their Nest-Egg Secure! Tons of great information and bonus is it is 100% COMPLIMENTARY!
*https://www.investopedia.com/terms/f/front-endload.asp
*** https://smartasset.com/financial-advisor/financial-advisor-cost