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.