Written by Each day, customers come to us and ask, how much should I expect to pay a financial planner. This is a very good question and we can certainly understand the need to know the prices. This is because the fee a planner charges could impact your portfolio value by hundreds of thousands of dollars over the lifetime of your investment. At Obsidian Wisdom, we have a fee-only model based on a percentage of your total income.
However, the truth of the matter is, a fee-only model may not be the best model for you. In fact, a commission only, assets under management (AUM) or hybrid of the three may be the best fit for you. This article is going to explain how much you can expect to pay an advisor in an honest and transparent way. By the end of this article, you will be able to make an informed decision that makes sense for you.
What are the different ways a planner gets paid?
You need to make sure you are paying the right amount for your financial planner. No one likes the feeling of being ripped off. You want to know you are receiving significant value for your purchase. The problem is that most financial advisors don’t outright tell you what they charge for their services. Which can be very frustrating because you are trying to make an informed decision. Which is difficult without knowing the cost and value provided.
- hourly or fixed fee for services
- commission based on the product/trade sold
- percentage of assets under management (AUM)
Hourly or fixed fee for services
When your planner charges you an hourly or fixed fee for service, you can expect to pay $100 to $400 per hour. Some advisors will know how many hours a particular service requires. They can use this information to turn their hourly rate into a fee for service. It is estimated you can expect to pay $2,000 to $7,500 a year for the ongoing services offered by a fee-only advisor. If you are not looking for ongoing services, you will be charged an average of $1,000 – 3,000 for a one-time financial plan.
The Obsidian Way
At Obsidian Wisdom, you can expect to pay a percentage of your overall income. This will ensure everyone has the ability to seek professional financial advice. If you make less than $100,000, you will pay 2% of your income to be advised on the other 98%. Less than $250,000, but more than $100,000 in household income has a fee of 1.5% of your income. Income over $250,000 will has a fee of 1% of your income. This fee includes your Wisdometric Framework financial plan and a year’s worth of services. Ongoing services is charged the same way each year.
Most fee-only planners charge a one-time, up-front fee because of the time-consuming nature (on both the planner and the client) of getting started. In the initial data gathering phase, you are gathering all relevant financial information. Then, we spend time learning about your financial goals. What you have done so far to accomplish those goals and any challenges you have faced. You then get to take a break, while we create your Wisdometric Financial Plan.
Once your plan is complete, you review our recommendations and we make any necessary tweaks. When accepted, we create login credentials for you with our custodian, client portal and other systems.
The good, the bad, the ugly of fixed fee
The key benefit of having a fee-only financial planner is he is not incentivized to recommend one solution over another. This is not to say an advisor who isn’t fee-only is going to take advantage of you. It is to note that an advisor paid for financial advice, is paid the same regardless. Whether you are looking to invest in the stock market, rental property, etc.
Removing this potential conflict of interest with your planner can help ease your concerns about motive. Another benefit to working with a fee-only planner is for those who don’t have a lot of liquid money to invest at the moment. If your money is tied up in a business or student loan debt, you won’t have the minimum investable assets required by AUM registered investment advisors.
There are challenges
The challenges some face when working with a fee-only planner is you are paying for all of these services yourself. Everyone doesn’t have the ability to commit to paying from their investment revenue or checking account. Unlike the AUM model, the financial planner’s income does not go down when your investments go down. Some people like the idea that advisor makes less as you make less. However, you also end up paying more as your portfolio grows.
What ends up happening is you usually save money the more money you have invested in a fee-only scenario. For example, instead of paying $95,000 in AUM fees to your advisor charging you 0.95% on your $10M portfolio. You would pay your fee for service rate of ~$8,000.
Commission-only fee
When your advisor is paid on commission, you may not have to pay anything out of pocket to meet with them. It is also probable they won’t charge you for ongoing meetings and wealth management. The chief benefit to having a commission only advisor is you will not be paying for any financial advice out of pocket. The challenge tends to be within the product recommendations and conflict of interest. An advisor acting in the capacity of a broker is offering services and products they’re paid to offer.
The conflict of interest arises because the brokerage is paying your advisor, so the advisor is only offering what the brokerage authorizes them to offer. For example, if a brokerage only offers annuities, then what do you think the financial planner is going to offer their clients? Since the advisor can only offer what the brokerage authorizes, the brokerage has the ability to offer products that could have higher fees. Think of it like a 401(k) or 403(b). The investment options tend to be limited and the fees are usually higher than if you had access to other investment options. This is where the potential conflict of interest could come up.
If the advisor is being paid by the brokerage firm and they have limited products they can recommend, it becomes more difficult for a good advisor to act as a fiduciary. On the other end of the spectrum, a planner with poor ethics is going to offer their clients the products that pay them the highest commission. For instance, if a brokerage is paying your planner a 1% commission for one product and a 30% commission for another product, an unethical planner will find ways to ensure every client receives the 30% commission product.
The nuts and bolts of commissions
With that said, there are multiple reasons you may find a commission only planner works for you. Even though the product choice may be limited, the products offered may still match your needs. You can also be working with an advisor who you trust, so you are not concerned about the potential conflict of interest. As mentioned before, if you do not currently have the ability to pay an independent advisor, starting with a commission only advisor is a great option.
The advisor who manages your company’s 401(k) will meet with you for free. They usually come to your company once a year or schedule a virtual meeting. Remember, your commission only advisor is usually limited to the scope of the services they are authorized to offer from the brokerage. If you don’t have a 401(k), you can meet with the financial services representative at your local bank. They don’t charge to meet with you either, but the products and services they offer are limited to the bank’s selection.
Percentage of assets under management
AUM is the most common fee model. Most registered investment advisors charge a fee related to the amount of assets they are managing. Studies show the average financial advisor charges an AUM fee of 0.95%. This means if you have $1 million dollars managed by a firm, you can expect to pay roughly $9,500 per year. The benefit of this model is your advisor makes less when you make less. Another benefit is most advisors who charge an AUM fee lower their fees as your portfolio increases.
While you may be charged 0.95% for $1M, your fee may only be 0.50% if you have $10M invested. Most firms will set your AUM fee based on your portfolio balance at the beginning of the year. For example, if you have a $1M balance on January 1st, you can expect to pay $9,500 with a fee of 0.95%. However, if the next January 1st portfolio balance has lowered to $8M, your fee will lower to $7,600. Conversely, if your balance increased to $11M, then your annual fee will be $10,450.
To AUM or not to AUM?
Since you are paying your financial planner directly, there is less of a conflict of interest tied to the influence of a brokerage. The advisor is independent of any brokerage and can create your financial plan autonomously. There is a conflict of interest when all (or the majority) of an advisor’s income is based on the size of your investment portfolio. As a result, the financial planner doesn’t have an incentive to advise you to purchase a business, invest in real estate or pay off debt. They simply aren’t incentivized to move your money from the stock market as you near retirement.
This is not to say they won’t make the right choice; but it is to recognize that a conflict of interest does exist. You will also need to consider the minimum amount of assets an AUM advisor will accept. Most planners who charge an AUM fee will not accept clients who do not meet the minimum required assets. This minimum tends to be $100,000 on the low end and can range up to $1M on the upper end. The major criticism of the AUM pricing model is that it doesn’t efficiently align the fee and the value the advisor is providing. The key benefit of a financial planner is the comprehensive financial plan, not choosing stocks.
Some advisors will argue a $1M portfolio has more complex financial planning need than a $500,000 portfolio. While true, few people think the million-dollar portfolio is twice as complex and the $500,000. Yet, in the AUM model, they are going to be changed twice as much.
Final thoughts
As you can see, what you should expect to pay a financial planner depends on several factors. It definitely depends on the manner in which the advisor is structuring their fees. You may feel as though you are not paying anything in the commission only fee model, but the advisor’s rate is built into your monthly payment. This could mean you are ultimately paying more than if you paid the advisor directly. If your advisor charges a monthly fee or a fee for service model, then the hourly rate and complexity of your financial plan will dictate your price. Last, you have the AUM model.
This should be the easiest model to know how much you should expect to pay a financial advisor. Your AUM financial planner is going to take the size of your portfolio and multiply is by their percentage rate. There are pros and cons to each model and you need to choose the best model for your needs. You may find an advisor who has a hybrid fee model that works for you.
If you are just starting out with little disposable income, a commission only model will work. You can decide to switch to an AUM model or fee-for-service model in five years. Regardless of what model you choose, you need to know how much and who is paying your advisor.
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