When shopping for a financial planner, it’s natural to ask, “How much do you charge?” If you’re expecting a simple, one-sentence answer, think again.
There are many ways consultants get paid, and it can get complicated. Their fee structure reflects the type of practice they want to run and the business model that reinforces their brand.
One of the best ways to vet an advisor is to ask how they arrived at the fee structure and why they chose it. What motivates them to charge this way?
“Every consultant loves to argue about which path [of getting paid] which is the best and which is the worst,” said Chris Cybulsky, a certified financial planner in Austin, Texas.
Many advisors base their compensation on a percentage of assets under management (AUM). The percentage, traditionally equal to 1%, often varies based on the amount of the client’s investable assets.
Other popular options include charging an hourly rate or a flat fee per project (perhaps to create a customized financial plan). In recent years, some advisors have adopted subscription pricing that offers ongoing levels of service with varying monthly or annual fees.
If you want to hire an advisor for both financial planning and investment management, you may encounter a hybrid fee structure. This means you’ll pay a percentage of the AUM for portfolio management plus a fixed or hourly fee for financial planning (which could include help with household budgeting, retirement planning, estate or tax planning, etc.).
More and more advisors prefer this hybrid approach because it stabilizes their income when markets crash and clients’ investable assets shrink. It also gives them the flexibility to serve a wider range of customers.
For example, many early- and mid-career professionals do not have significant investments to manage or their assets are tied up in a tax-advantaged retirement account such as a 401(k). But they may be willing to pay an advisor a flat fee for targeted financial planning and advice.
There are also advisors who earn commissions when they buy and sell certain financial products (such as annuities or mutual funds) or insurance policies on the client’s behalf. The term “fee-only” refers to advisors who charge no commissions and generate all of their income from commissions.
An advisor’s fee structure is itself revealing. Those who prefer financial planning to portfolio management tend to charge flat-rate or per-project fees that reflect the relative complexity of the client’s needs.
“You can tell how they think about the value of their service offering by the clarity and logic of how they present their rates,” said Sara Grillo, a New York-based marketing consultant. “If they say they focus on financial planning, but charge a fee on assets under management, you should be skeptical of any claims that the planning is sound.”
In fact, it may indicate that the advisor wants to oversee as many of your assets as possible. The more assets transferred to the advisor’s company, the higher the advisor’s AUM fee will be.
“Their primary concern may be growing your assets and making sure those assets stay with them,” Grillo said. “I am a supporter of flat rates because they promote greater clarity and transparency.”
Advisors working for large financial services firms are more likely to charge for AUM or collect commissions for selling specific products. This isn’t necessarily a red flag – you can take advantage of it if you want active investment management and the firm boasts top asset managers, proprietary research, or access to alternative investments that can diversify your portfolio.
“If advisors charge an hourly rate or use a flat-fee model, they are likely a smaller firm or sole practitioner,” said DJ Hunt, a certified financial planner in Melbourne, Florida. “So you might have no staff, just one eye on everything.
You know what you want
As long as you don’t need investment management, because you’re a do-it-yourself investor or don’t have a lot of investable assets, it may make sense to pay fees solely for financial planning expertise.
It’s easier to price a consultant if you know what you need from the start. Asking an asset manager to take your $300,000 or $1 million portfolio and make investment decisions that produce reasonable returns and reflect your risk tolerance is one thing. But if you’re more interested in knowing whether to rent or buy a home, how to save for a child’s tuition, or how to know if you can afford to retire, you’re better off paying a fee to an experienced, accredited financial planner. .
“Assessing your needs can get complicated,” Hunt said. “When you first meet with a counselor, you may think you only need help in one area. This can lead to a broader discussion about other related needs. Then you say, “I hadn’t thought of that,” and realize it’s just the tip of the iceberg as your needs expand.
Moreover: Saving too little? Spend too much? How to know if your financial worries are rational (or not).
Read also: How AI will change the way financial advisors manage your money