The fees associated with financial planning can vary greatly depending on the advisor and the type of service provided. Often, investors may hesitate to hire a financial advisor due to a lack of understanding of how their fee structure works. Knowing the fees and the services included in the fee can help you in deciding which advisor to hire. A comparison of popular financial planning fee structures can also help you identify their pros and cons in detail.
You can reach out to a financial advisor to know more about how they charge their clients or read this article to get an idea of the most popular financial planning fee structures and what they entail.
You will likely find 5 general financial planning fee structures in the market, as explained below:
1. AUM-based financial advisors
An AUM-based financial advisor charges a fee based on their clients' Assets Under Management (AUM). The AUM typically includes investments such as stocks, bonds, mutual funds, Exchange-Traded Funds (ETFs), etc., that the advisor manages for the client. The fee is calculated based on the total value of all these investments.
Pros of working with an AUM-based financial advisor:
- Transparency: You know exactly how much you need to pay the financial advisor based on the value of your assets. The percentage is fixed throughout the term of your arrangement.
- Alignment of interests: Since the financial advisor's fee is based on the performance of your investments, they have the incentive to help you grow your portfolio and earn profits. This enables you to reach your goals.
- Personalized investment advice: AUM-based financial advisors offer customized investment advice tailored to your financial goals and risk tolerance.
Cons of working with an AUM-based financial advisor:
- Higher fees: AUM-based fees can be higher than other fee structures, particularly if you have a more extensive portfolio. The more you earn, the more you need to pay the advisor.
- Potential conflict of interest: The financial advisor may encourage you to invest more to increase their fee income rather than acting in your best interests. They may not always consider factors like your investment budget and future requirements.
- Limited scope of services: AUM-based financial advisors typically focus on managing investment portfolios and may not provide comprehensive financial planning services like estate planning, tax planning, healthcare planning, etc.
2. Subscription-basedfinancial advisors
A subscription-based financial advisor offers ongoing financial advice and support for a recurring fee. The fee can be charged monthly or annually if the arrangement is still active and the financial advisor offers you the intended services. Subscription-based financial planning fees include investment advice, portfolio management, and a specific number of meetings, catch-ups, calls, etc. Here are some of the pros and cons of working with a subscription-based financial advisor:
Pros of working with a subscription-based financial advisor:
- Affordable: Subscription-based financial advisors often charge lower fees than traditional AUM-based advisors. This fee structure can be suitable for those who wish to spend less money on hiring a professional.
- Transparent: Subscription fees are fixed at the beginning and remain unchanged. The arrangement is entirely transparent, making it easier to understand the inclusions and exclusions and prepare a budget.
- Comprehensive financial planning: Subscription-based financial advisors may offer a more comprehensive style of financial planning, including services like retirement planning, tax planning, estate planning, and more.
Cons of working with a subscription-based financial advisor:
- Limited investment management: Subscription-based financial advisors may focus less on investment management and more on financial planning. This may not be suitable if your primary focus is on investment planning.
- Higher upfront fees: Some subscription-based advisors may require an upfront fee to start their services. This may discourage some people and deter them from hiring a professional.
- Limited regulation: Unlike AUM-based financial advisors, subscription-based advisors may not be regulated by the SEC or other state regulators.
3. Hourly fees-based financial advisors
Hourly fee-based financial advisors charge you a fee based on the time they spend working with you. They can offer financial planning and investment management services. However, the fee depends on the amount of time spent on the job. Here are some pros and cons to consider when deciding whether to work with an hourly fee-based financial advisor:
Pros of working with an hourly fee-based financial advisor:
- Transparent: Hourly fee-based advisors charge for their time. This establishes transparency, so you know exactly what you are paying for. You can gauge whether or not there is any value in the services provided and take a call accordingly.
- Unbiased advice: Hourly fee-based advisors do not earn any commission or additional fee for recommending certain investment products like AUM-based advisors. As a result, they do not have any hidden agenda or personal bias when they offer investment advice. In most cases, they have the best interest of their clients.
- Cost-effective: Hourly fee-based financial advisors can be ideal for clients who only need occasional financial advice or those who are just starting out and are skeptical about full-time financial advice.
- Flexibile: You can enjoy greater flexibility when working with an hourly fee-based financial advisor, and you get to choose when and how often you need the services of the professional.
Cons of working with an hourly fee-based financial advisor
- Variable costs: Hourly fee-based advisors may charge different rates depending on their services or the city or state they are based. The costs can also vary based on time, as you may not know in advance how many hours you will need the professional for. This can make it difficult to estimate the total cost and may upset your monthly budget.
- Lack of regular monitoring: Hourly fee-based advisors may not provide ongoing reviews, monitoring, and tracking of your accounts, investments, profits and losses, etc., which can put the entire responsibility of managing your account on you.
- Limited scope of services: Some hourly fee-based advisors may only offer limited financial planning or investment management services, which may not be sufficient for you if you have more complex financial needs.
- Potential for conflicts of interest: Hourly fee-based advisors may be incentivized to prolong their services to increase their billing hours, which could create a conflict of interest with you.
4. Fee-only financial planners
Fee-only financial planners only charge fees for their services and do not receive commissions or other forms of compensation from selling financial products. Their financial planning fees can differ based on whether they offer investment advice, debt management advice, retirement planning, etc. Their fees also vary based on the number of sessions they offer. A fee-only financial planner may offer single or multiple sessions, depending on your preference and the severity of your financial concerns.
Here are some pros and cons to consider when deciding whether to work with a fee-only financial advisor:
Pros of working with a fee-only financial planner:
- Unbiased advice: Fee-only financial planners do not receive commissions, referral fees, or other incentives for recommending specific financial products or services. This means they can provide objective advice in their client's best interest. You can trust their advice without being doubtful.
- Client-focused financial advice: Fee-only financial planners work in favor of their clients. They are not focused on pushing financial products but on helping their clients achieve their financial goals.
- Comprehensive services: Fee-only financial planners may offer a wide range of financial planning services. They can be ideal if you need professional assistance on multiple financial topics like saving, investing, debt management, etc., at the same time.
Cons of working with a fee-only financial planner:
- Higher fees: Fee-only financial planners may charge higher fees than others who receive commissions. Since these professionals do not earn any extra commission from financial companies, their only source of income is their clients. Fee-only financial planner rates may be higher to compensate for the lack of commissions.
- Limited investment options: Since fee-only financial planners do not receive commissions for recommending specific financial products, they may have limited investment options to recommend to clients. They may not be up to date with the latest products in the market as companies do not pitch their products to them.
5. Combined fee structure
A combined fee structure for financial planning refer to a compensation model in which financial planners charge a combination of fees and commissions for their services. Financial planners may ask for a percentage of your AUM, a fixed fee per hour, or a flat fee based on their services. They may also resort to other modes and types of payments, like subscription-based models.
Pros of working with a financial advisor with a combined fee structure:
- More flexibility: A blended fee model allows financial planners to provide clients with a wider range of services. This adds flexibility and allows you to choose multiple financial planning services.
- Lower upfront costs: With a blended fee structure, the financial advisor can lower upfront costs as they may earn commissions later.
- Incentives to act in the client's interest: Financial planners with a blended fee structure may be able to focus on their client's interests as they have more flexibility concerning price with enough room to earn money. This helps them build long-lasting relationships and act in the client's favor.
Cons of working with a financial advisor with a combined fee structure:
- Limited transparency: Blended fees can be less transparent than other compensation models, as it may be difficult to understand how much you pay for different services. This also adds scope for fraud or unjust pricing.
- Higher long-term costs: While blended fees may offer lower upfront costs, the commissions paid for selling financial products can add up over time and lead to higher overall costs.
How to choose the right financial advisor and fee model for your financial needs
A comparison of wealth management fees can help you narrow your search for an advisor and help you a choose the most suitable professional for your needs. It helps to review all the pros and cons and see how much value a financial advisor can add to your financial plan. It is advised to be realistic about your investment budget and not spend too much if you cannot do so comfortably. At the same time, if you have the financial means to hire a professional, it may be better not to cut back on costs. Understand that a financial advisor can generate much more money for you over the years with sound professional advice.
Ultimately, the right financial advisor and fee model will depend on your unique circumstances and preferences. Choosing an advisor who understands your goals and can work with you to create a comprehensive financial plan is crucial. It is also essential to consider their credentials, experience, and approach to financial planning. Enquire about their compensation model and how they are paid for their services. Consider the advantages and disadvantages of each fee model, such as hourly fees, commission-based fees, and fee-only financial planning. Also, remember that a financial advisor cannot guarantee investment performance, and you must be willing to accept the risks associated with investing.
Use the free advisor match service to hire a suitable financial advisor with the fee model you prefer. All you need to do is answer a few simple questions on your financial needs, and the match tool can help connect you with advisors that are best suited to help you reach your financial goals and requirements.