How Much Do Financial Advisors Cost? - YouTube

Working with a financial advisor is  not the right choice for everybody,

but if you do decide to get some  help with financial planning or

managing investments, how much does  it cost and what are your options for

paying? That's what we're going to  talk about in the next couple of

minutes here. I'm of course biased,  but it can be helpful in some

situations to get some guidance as  you navigate major life changes,

or if you just decide you  want a second set of eyes or

you don't want to deal with these  things yourself. Let's briefly go over

when it makes sense to hire an  advisor, and then we'll look at

some studies in terms of how much  advisors charge their clients.

And we'll quickly review the different  compensation models available for

clients. The only time it makes  sense to hire somebody is if you

actually get some value out of the  relationship, and that might be something

like just saving time. You can certainly  figure all of this out yourself,

you're smart enough. But if you choose  to have somebody else handle these

things for you, that's one reason to  hire somebody, you might also just

want a second set of eyes on  things. And an advisor who does

this every day might be able to  point out something that you could

potentially tweak and improve your  financial plan with. You might want help

dealing with the logistics, so sometimes  that's just the paperwork or figuring

out what it takes to get this  task done, it's really important,

but not much fun, and it doesn't  feel urgent, like it needs to

be done yesterday, you can actually  take care of it, quit thinking about

it and go on to more important  things in life. It's also nice

to have an outside perspective sometimes.  We get wrapped up in these decisions,

we all do because we're human, and  sometimes that outside view of things

can give you a different way  of looking at it and help you

discern what matters most, what doesn't  matter most, and just kind of talk

through things with you so that you  can make a decision that benefits

you the most. And for some clients  I work with, they just want

a second set of eyes on things,  they've got it pretty well figured

out, but they want to run it past  somebody and just validate...

We'll talk about a couple of different  types of advisors, but the thing

that's most important is that you get  somebody who is competent and really

cares about helping you figure things  out and make the right decisions given

your situation. If you end up talking  to somebody who gets evasive or

doesn't want to talk about how  much things cost or go into their

background or anything like that,  that's kind of a red flag that you

might want to keep looking, but if  you've got somebody who is completely

transparent about how much they're  making, how much you're paying, then

that's a good sign. So let's get  into the two types of advisor

compensation, we can broadly categorize  this as fee only or commission,

and I'll just let you know that  I might have some biases because

I am a fee only advisor, but  we're going to go over the

two major categories of compensation  models here. So a fee only advisor

cannot receive commissions for work  they do with clients, instead they might

charge some flat fees or hourly  fees, and we're going to talk about

some research on how much exactly  advisors charge, but they don't get a

commission for selling a product, they  just charge a fee and they typically

tell you what that is upfront,  send you an invoice and you see

what the fee is as you pay it. In some cases,

you're working with these advisors on  an ongoing basis, maybe year by year,

that sort of thing, or in other  cases, you might work with an

advisor on a one time basis,  so it might just be a project

where you have them help you  out. Put a second set of eyes

on things or do some retirement projections  for you, those are all different

options. You also can choose if you  want your financial advisor or a

financial planner to manage investments  for you, so some advisors will require

that you have money with them that  they manage, and they typically bill

you on those assets, not always. Other  advisors might say, You don't have

to hand me assets, we can just  work together, again on that hourly

or that flat fee basis, it  just depends on the advisor,

and everybody's all over the board  in terms of what they're willing to

do and what they require. Next you  have commissioned advisors, and these

are people who earn a commission  when you buy a product,

so that might be if you invest  money into a product like a

mutual fund, or a REIT, a real estate  investment trust, or an insurance

product, like an annuity. That sort  of thing, they get a commission when

you do that, those commissions are  typically paid to the advisor up front,

but there might be some ongoing what's  called "trail" compensation that

comes each year after the initial  sale. Before I go any further,

just a quick reminder that this  is just a short video and it

gives you a high level overview  of things, but please speak with a

professional, get somebody to talk to  you who is familiar with your details

and get some professional advice that  way, you reduce the chances of any

problems. So how much exactly do  financial advisors charge? And right now,

we're looking at fee only financial  advisors, and so I got some information

from a couple of different sources,  primarily Kitces and Bob Veres surveys

where they ask advisors, how much are  you charging? Among many other things,

but again, when I say that the  results are all over the board,

and when you actually talk with  an advisor, this is where you need

to get their details, but just  to let you know, for a financial

plan, it's anywhere from $2,500 to  $3,000. That is kind of consistent among

both of the studies, and that  is where you would be going over

a number of your personal financial  topics and getting some individualized

guidance, some advisors charge what's  called a retainer, and it's going

to depend on who regulates the  advisor, which state they're in,

for example, if that's allowed, but  that might be something where you're

paying a monthly or an annual  fee, and that might also be on

top of an initial upfront fee, but  Kitces shows that the median there

is about $4,000. Just a quick  refresher of what the median is:

That is where we take the  results and we line them up from

smallest to largest, and the median  is going to be the one that's

exactly in the middle, and even  if there are some big outliers,

like on the bottom of this list  here, they don't necessarily skew it

in the same way that an average  would be, so roughly half of

the advisors charge more, half of the  advisors charge less, and we can't

say exactly how much more or  less they might charge, so again,

you have to talk with an  advisor to get that information,

some advisors publish their pricing on  their website, that's certainly helpful

as you do some research, now,  let's look at hourly charges,

and you can see that it's  roughly in the $250 to $300 per

hour range for an experienced advisor.  When we get into AUM or assets

under management, this is typically  where an advisor is going to be managing

your money for you, so they're  picking what to buy and sell and

win, and they're just doing everything  in your account, not necessarily

needing your involvement, so it's  a hands off way to invest with an

investment advisor, the typical  fee there is going to be 1%

per year on the first million dollars,  and then it typically goes down

as your assets increase after that,  but again, pricing is all over the

board, and there are also some flat  fee models available. So an investment

advisor might say, I'm just going  to charge you X amount per year

for managing whatever amount of  money it is, it might be $4,000 per

year, $10,000, $20,000. It just  depends on a lot of different things,

including how much you have, what  services they're providing and many other

things, in most cases, that AUM fee  comes out of your account directly,

so you don't typically write a check,  although that option is often available.

What usually happens is each quarter  they take a quarter of that fee,

so if it's a 1% per year fee,  the advisor might take one

quarter of 1% each quarter, and that  way they end up getting compensated

throughout the year, and then if  you leave at any point then you

stop paying those fees, of course.  Besides those major models that we just

talked about, there are a number of  other options there that are growing

in popularity, so some of them  look at your income, for example,

or your net worth, and it might  be some percentage based on that

one or 2% of your total income  and or your net worth, or

they're just based on the complexity  of what you have going on,

are you married or not, do  you have a business or not,

do you have these other factors or  not... Then an advisor can figure

out what the pricing model is going  to be, and then they typically

tell you that upfront, now let's  take a look at commission advisors,

and with mutual funds, this is kind  of a traditional advisor that sells

mutual funds, it's usually up to 5.75%  upfront comes out of your investment,

so for every $100 you put in  $5.75 would come out of what

you invest, and that does not go  into the market, that goes over

to the broker dealer firm typically,  and then some portion of that goes

over to the advisor that's what's  called an "A share" class A share,

but other classes are out there,  and some of them maybe aren't out

there as much as they used  to be, but some of them might

charge 1% upfront and you don't  necessarily have that come out of your

investment, but it goes to the  advisor and if you happen to leave

within a year, you would be paying that 1%,

there are just lots of different  options out there that might or might

not still be in the world when  you invest with these mutual fund

shares, there might also be what's  called a trail compensation, so for a

class A share that pays that  5.75% or less, the more you invest

with that fun company, that decreases,  but those typically pay 0.25%

or quarter percent per year to  the advisor on an ongoing basis,

so that gives them a little bit  of revenue on going after that

initial upfront commission with stock  trades, I'll just touch briefly on

it because I don't see it that  often, but I think it's probably

still out there, and  traditionally it would be 1 to 2%

of the amount you're trading is  what the broker would charge as a

commission, probably on the lower  end these days, just a way of doing

it, if they're going to just  trade stocks or ETFs for you,

then we get into insurance products,  and in this case, I'm mostly talking

about annuities for investors or for  retirement planning, and in those cases,

the compensation to the advisor is  baked into the product, so you don't

actually see a commission, although  a commission is almost always paid,

but you don't see it as a  line item or a transaction,

so you can't tell exactly how much  it is, but rest assured people

are getting paid, the advisor is getting  paid, the insurance agent is getting

paid in the insurance company is also  getting compensation, so you typically

need to ask how much that might  be. Now, I have an article

here from TheBalance, and that's going  to show us something that's basically

consistent with what I've seen in my  experience, and so with variable annuities,

that commission might be 4% to 7%  upfront, and there might also be

some ongoing trail commissions. If  you have FIAs (fixed index annuities),

also known as equity indexed annuities,  those tend to pay higher commissions,

6% to 8%, although if you  get a really long surrender,

it might be even more than  8%. So let's just say you put

in $100,000, that might be $8,000  that goes to the insurance agent who

sells you that product, and just keep  in mind that surrenders might also

be another form of cost, if you're  wondering what it costs to work

with a financial advisor, you do  lose some flexibility in some cases,

using annuities, if they have a surrender  period, and that basically means

if you pull your money out  early and go away with it,

and I'll lump sum, that  you might have to pay a fee

when it comes to single premium,  immediate annuities, this is your plain

vanilla lifetime income type of  thing, where you say, I've got a chunk

of money, I want you to turn  it into a stream of income

that last... Let's say for  the rest of my life or for 20

years, those are lower commissions, 1 to 3%

longevity, annuities get up there a  little bit higher and fixed annuities

are also in the ballpark there.  So what you can see is that

it kind of depends on exactly  what type of annuity you buy,

but you're not necessarily going  to know exactly what it costs you.

So once again, you've got several  options. Now, if you found this helpful,

please leave a quick thumbs up, and to take care.