What are the Costs of Hiring a Financial Planner and Is Hiring One Worth It?

One needs to be efficient when it comes to managing their finances. Right from setting financial goals to choosing the right investment modes requires a level of financial expertise and management. You also need a good strategy when it comes to picking tax-management strategies, creating an effective retirement plan, and framing an optimal estate plan. To avoid complications when it comes to money-related matters, timely financial planning is vital to ensuring a secure financial future.

If you do not possess the required expertise or sufficient time to plan your finances, it is recommended that you hire a professional financial advisor. Financial advisors, also known as financial planners, are skilled professionals who can help individuals in matters related to personal finance and wealth management. They hold expertise in several areas such as creating a budget, managing debt, and optimization of taxes to create a significant retirement corpus, or planning future healthcare needs. A good financial planner offers sound financial advice along with ensuring that you save time and money, and minimize your stress among other benefits.

Despite offering important benefits, many people are still not convinced if hiring a financial planner is worth it. With so much information available on the Internet for free, it may not seem like a wise decision to pay someone for something that you can probably do yourself. On top of that, if you hire a financial advisor, you would have to pay him 1% of your Assets under Management (AUM) each year. But when you compare the benefits of hiring a financial advisor against their costs, the former outweighs the latter. Paying for professional financial advice is a good investment to make. As per Vanguard, you can boost your investment returns by a margin of 3 percent if you apply an expert’s financial advice. This advantage is called "the advisor’s Alpha". As per another study, a skilled financial advisor has the potential to increase your returns by 3.75% each year. With this information at your disposal, you can compare the increase in returns with the cost of hiring a financial advisor and evaluate if hiring a financial planner is worth it or not.

Let’s find out everything you need to know about the costs involved in engaging the services of a financial planner and if hiring one is worth it:

What is the cost of hiring a financial planner?

To better understand the costs involved in hiring a financial advisor and if they are worth it, you need to know and grasp the different fee structures financial advisors use with their clients.

A few of the most common fee structures used by financial advisors to charge their clients are:

  1. Percentage of assets
  2. Charging a percentage of assets that a financial advisor manages on behalf of his client is one of the most commonly used fee models. It is also known as AUM which refers to the market value of the assets managed by the financial advisor. Typically, an advisor charges 0.50% to 2% per year on average. The important thing to note here is that this particular method works on a sliding scale that means with the increase in the value of AUM, your financial advisor will likely charge a lower percentage for the same financial advisory services. As per financial experts, if a financial planner charges a fee of 1% for $1 million AUM, the fee would likely reduce to 0.50% at $10 million AUM. This means that if your advisor oversees assets worth $10 million on your behalf in the future, you would only pay him a sum of $50,000 for the entire year in lieu of their financial advice. This figure is acceptable if one measures it against the absolute returns of your portfolio. Several investors tend to favor the AUM method since the fee is taken out directly from their accounts, and no cheque has to be issued. If the financial advisor receives his fee from a tax-deferred account, like an IRA, it is even more advantageous because the deductions will lower the account balance and the taxes for withdrawals.

  3. Hourly charges
  4. Financial advisors who levy hourly rates charge you for each hour of advice they offer. The more help you require, the higher the sum you need to pay as compensation to the professional. In this fee model, financial advisors tend to make anywhere between $120 and $400 an hour on average. This method works best for clients with less complicated financial planning requirements. If you wish to carry out the plan yourself, then paying by the hour is a great option. But if you want the advisor to guide you, you may have to shell out an important sum of money. In addition, you should be prepared to pay a higher hourly rate if your advisor is highly accomplished or skilled. However, since the hourly fee model is not bound to any specific financial product the value of your investments, you will most likely receive objective advice free from bias.

  5. Flat fee or fixed fee
  6. In the flat or fixed fee model, you pay a one-time charge to your financial advisor for their services. For example, you engage a retirement financial advisor for creating a retirement plan for you. You pay him as per the flat-fee model and the advisor fulfills the specified agreement of services leading to the termination of the contract. The fixed fee differs from project to project and depends upon the kind of service, level of service, and experience of the concerned financial advisor. On average, a retirement financial advisor may charge anywhere between $700 and $3,500. One of the biggest advantages of paying by the flat-fee method is that you know the exact amount you have to pay for the service. You also gain the benefit of being able to budget effectively while securing the financial help you need. Moreover, since flat-fee models are not bound to any specific financial products, you can rest assured that you will be receiving objective counsel.

  7. Retainer fee
  8. In the retainer fee model, you are charged a flat fee at predefined intervals, such as every quarter or year. You hire the services of a financial advisor for a specific period of time. This fee model is more suitable for individuals whose financial situation frequently undergoes a change and is more complex in nature. For example, if you need to regularly take out an income from your investments, run a small business, or have multiple rental properties for tax purposes. As with the flat-fee model, the exact retainer fee is determined by the scope of services rendered and the experience level of the advisor you are hiring. A financial advisor using the retainer fee model can expect to earn anywhere between $2,000 to $10,000 per year. This sum can increase depending on the complexity of your financial situation.

  9. Commission-basis
  10. Commission-based financial advisors’ main source of income is through the financial products purchased by you on their recommendation. These advisors do not charge any fixed, retainer, hourly, or asset-based fee and only earn through the financial instruments (company shares, bonds, insurance policies, mutual funds, etc.) sold by them. The more financial products they sell, the higher is their income. Typically, these advisors earn between 3 to 4 percent commission on average. For example, if you invest $1,000 at the suggestion of a financial planner in a mutual fund that levies a 5% commission, you would pay $50 as commission to the advisor and invest $950 in the mutual fund. The value of commission-based advisors can be seen when you want to invest in a particular financial product and want sound advice before you go ahead with your decision. Apart from this, since these advisors are independent in nature, they can offer more diverse financial products, actively manage the entire purchase-sale process, and are more cost-efficient compared to other financial advisors. That said, you may not always be able to fully trust commission-based advisors since they are not bound by fiduciary duty, hence, they are not obligated to act in your best interest at all times. Moreover, these advisors can offer biased advice to serve their personal interests to earn higher commissions.

    Apart from the aforesaid five kinds of fee models, some financial advisors can use other fee structures such as performance-based charges or a mix of commission-based and fee-only models known as a fee-based fee structure. In the performance-based model, the advisor charges an additional fee if he meets a specific performance benchmark. Whereas in the fee-based fee structure, the advisor may levy a percentage of your AUM for the investment services and also charge a commission on the financial products you purchase through them. Also, financial planners can combine one or two fee-only methods to receive compensation for their services. These methods include hour-based pay, AUM method, retainer fee, and flat or fixed fee.

Additional costs

After you have understood the fee structure used by your financial advisor to charge for their services, you will need to understand any other additional costs levied by them as well. These charges may not directly relate to the financial advisory services availed by you but may constitute a part of your overall financial plan. For example, you may have to pay brokerage, custodial, and other third-party fees. Similarly, if you invest in a mutual fund through your advisor, you will incur costs associated with investing in the mutual fund in addition to your financial advisor’s fee. When you are in the process of hiring a financial advisor, get an exhaustive cost estimate that includes additional charges, if any.

Traditional versus Robo-advisors

Now that you know about the costs involved in hiring a human professional financial advisor, you must also know how much you will have to pay for the services of a robo advisor. Typically, robo advisors cost less compared to their human counterparts with their fee ranging between 0.25% to 0.89% of your AUM. Though the fee is cost-effective in nature, you need to understand that the level of services offered differs as well. Robo advisors are digital platforms that run computer algorithms to provide financial planning services in line with your goals and risk preference. These advisors function with little to no human supervision and make use of an online questionnaire to find out your financial goals, objectives, risk preference, etc. By evaluating your information, they are able to offer sound investment advice and create an optimally diversified portfolio for you. Though robo advisors provide an economical service, they can only offer limited personalized financial advice since they have insufficient expertise in financial management. Moreover, they can only extend standard services like portfolio creation, opening a mutual fund account, etc. Robo advisors are targeted at the masses and thus suffer from restricted flexibility. The advice they provide to their clients is based on an outdated investment theory. Robo advisors are largely suitable for investors having a low bank balance and less complicated financial situations.

Can a financial advisor help you save money? If yes, then how much?

Most people tend to consider hiring a financial advisor as an expense rather than as an investment. For example, assume you pay between $500-$1,500 for financial advisory services wherein the investor helps improve your investment returns by $2,000 and boost your retirement savings by $1,000 a year. In this scenario, you can potentially gain $1,500 which is why you should first calculate the benefits of hiring a financial advisor before rejecting the idea. If you have reservations, you can go for a pre-contractual meeting with the financial planner to understand their ideas and how they can help you achieve your financial goals.

How to assess if hiring a financial advisor is worth it

The best way to examine if working with a financial planner is worth the cost is by listing down the pros and cons of the relationship. Moreover, weigh the cost of hiring an advisor with your returns and your overall net worth. If a financial advisor has successfully added value to your wealth through their counsel or services, then hiring one can be beneficial for you. Moreover, if the advisor empowers you to achieve financial goals (such as buying a house, creating a retirement corpus, drafting a holistic estate plan, etc.) and gives you peace of mind, then the money you are paying to your advisor is worth it.

First off, you need to list down the pros and cons of hiring a financial planner. Assess the cost of hiring an advisor against the returns that you can earn and your overall net worth. If a financial advisor has helped create more wealth for you through their counsel or services rendered by them, then engaging his services is a beneficial decision for you. Furthermore, if the advisor allows you to reach your financial goals such as purchasing a home, creating a retirement corpus, designing an estate plan, etc., and enables you to have peace of mind, then the money you are spending on your financial advisor is worth it.

Moreover, you get several benefits if you choose to hire a financial advisor starting from holistic tax management to efficient retirement planning to profitable portfolio management. You may not require all these services at the same time but with advancing age, you may need their professional help. Take estate planning for instance. A competent financial advisor can help draft a comprehensive estate plan for you wherein you can ensure that your estate passes to your heirs smoothly with minimum taxes and legal hassles. Your advisor can also assist you in getting in touch with an attorney. The attorney can help you with the drafting of the will, creation of a trust, power of attorney, etc.

What qualities should a competent financial planner have?

If you believe that you have found the right financial planner who fits your budget and can help you achieve your financial goals, you would do well to hire one. However, do take into account that a good financial advisor should possess certain necessary qualities and competencies, such as:

  • Valid qualifications, educational background, and certifications
  • Financial expertise in offering financial planning services whether generalized or specialized
  • Ability to work in an orderly and systematic fashion, and understand your needs, financial situation, life goals, risk tolerance, investment preferences, etc.
  • Should place your interests above their own and offer personalized advice that meets your needs. Such advisors are generally known as fiduciary advisors. Most fee-only financial advisors are fiduciary advisors.
  • Must meet the investor regularly to go over the financial plan and report on progress made, if any. Also, should be available to answer any financial queries and offer required guidance.
  • Being transparent about the fee model and additional charges that the investor would be asked to pay
  • Should be able to handle himself in pressure situations and not make decisions born out of panic
  • Become the focal point of contact for all financial matters
  • Should work towards maximizing portfolio returns and wealth creation while reducing taxes in the long run through the use of efficient tax-saving strategies
  • Should be on top of market fluctuations to be able to take advantage of lucrative opportunities while minimizing losses

To conclude

If you wish to find out whether engaging the services of a financial planner is worth it or not, you need to assess the difference they make to your financial situation. If the advantages outweigh their fee, you may consider hiring one. Though, to restrict your decision solely on how much their services would cost you is not recommended. In addition to the cost-return analysis, you need to evaluate whether they can lessen your financial worries and if they secure your finances with a view towards the future. Choosing to hire a competent and qualified professional financial advisor would be a prudent decision on your end, so ensure that you do so at the earliest. Use the free advisor match tool and get connected with 1-3 financial advisors that may be able to help you with your financial goals and needs.

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