What Do Financial Advisors Do & How Much Do They Cost?

Good financial advice can help make you wealthier, reduce your debt, or cushion your retirement. But it can also cost you more than you think. And bad financial advice can be even costlier. That’s why it’s important to choose your financial advisor carefully and understand the tradeoff between what you’re paying and what you’re getting in return. To paint the big picture of financial advisor costs, this article lays out the fees, benefits, and risks.

If you’re confused about what financial advisors cost – or even who they are and what they do – so are most people. According to recent research, “Over the past two decades, technology advances have created greater transparency into how financial services firms behave, the value they offer, and the fees they charge. Unfortunately, too many Americans still don’t have a good understanding of how much they pay their advisors.”¹ Check out these findings:

• 60% of investors who frequently discuss investment options with a professional believe that they do not pay fees for investment advice, according to Financial Industry Regulatory Authority (FINRA).² Yet they usually do, at an average of nearly 1% of the asset value the advisor manages for them.³
• 42% of mutual fund owners don’t think they pay mutual fund fees, FINRA found. But they do, whether it’s a one-time fee when buying or selling, or an expense ratio of 1% or more.³
• 61% of investors do not know how much they pay in investment fees, according to a Harris poll.⁵

There’s good cause for confusion and ambivalence about financial advisors’ fees. While some fees are clearly stated, others are buried, and many may seem too insignificant to bother with. But your financial advisor’s costs can actually have a big impact on your finances. 

How big? Literally tens of thousands of dollars, over time. In the chart below, the Securities and Exchange Commission (SEC) compared a 1% and 0.25% ongoing fee on a sample investment portfolio. Over 20 years, the higher fee (green line) would reduce the portfolio’s value by nearly $30,000 compared with the lower fee (blue line).⁶

Portfolio Value from Investing $100,000 Over 20 Years

How could that be? Saving and investing are percentage games. Every fraction of a percent that you gain really counts, as it is reinvested and “compounds” over time, accelerating your investments’ growth by delivering returns on your returns. Financial advisory fees have the opposite effect, since they reduce the amount that you are reinvesting and compounding over time.

One way to break down the types of financial advisors is to look at licensing, registration, and certifications.

• Registered investment advisors typically earn a percentage of assets under management to advise clients on their portfolios of stocks and bonds. Many are Chartered Financial Analysts, a certification that requires passing rigorous exams.⁷  Their average fee of nearly 1% on assets usually declines for portfolios over $1 million. Unless they are “fee-only” advisors, some may also get commissions in the single to double-digits for selling you mutual funds, insurance, annuities, and other products. The SEC, where most are registered – although some have state licenses – provides a lot of background information about specific investment advisors and their firms.⁸
• Certified financial planners help clients with planning retirement, managing taxes, choosing insurance, setting up their estates, and meeting other financial objectives. They tend to work for fixed fees, of $100–$300 per hour or $1,000–$3,000 for a project like creating a financial plan.⁹ The Certified Financial Planner Board of Standards’ website is a hub of information about them.¹⁰
• Brokers make commissions to execute trades and other transactions. FINRA regulates brokers, and its BrokerCheck online tool provides detailed information about them.¹¹
• Robo-advisors are digital platforms that collect financial information from clients and automatically invest their assets, for average fees of 0.2–0.5% on assets under management. Robo-advisors must also be registered with the SEC and can often be found on BrokerCheck as well.¹²  

All that said, it’s not uncommon to see hybrids of all four of the above, going by names including money managers, wealth managers, private bankers, and others. There are also big, medium, and small advisory firms, including giant low-cost mutual fund companies and online fintechs as well as local boutique outfits. 

“Advisors offer a range of services and fee structures, and a lot of clients can feel intimidated by both the jargon and the concepts,” the Wall Street Journal reports. “But if people don’t get the relationship with an adviser right at the beginning, the mistake could be compounded over years – and that can end up costing them hundreds of thousands of dollars over a lifetime.”¹³

Of course, people can save and invest without financial advisors, who neither guarantee that they will outperform the market nor that you will achieve your financial goals. Still, a financial planner can be worth far more than their costs, helping you look at the big picture and guiding you through budgeting, tax issues, retirement planning – and through major life events like paying for college, getting married, and starting a family. Investment advisors can improve your returns on investment, with advice on sensible asset allocations, low-fee options, and steady strategies during volatile markets.¹⁴ 

Bad financial advice is a different story. For instance, fees and commissions can pose potential conflicts of interest between an advisor and a client. “Annual losses from conflicted investment advice range from $24.2 million in Wyoming to $205.3 million in Iowa to just over a billion in Texas and to nearly $1.9 billion in California,” according to a 2017 report from the Economic Policy Institute.¹⁵  The federal government recently loosened the regulation of fiduciary standards, which require financial advisors to put their clients’ interests ahead of their own, and some professional and advocacy groups are stepping in with their own codes.^16,17

Ultimately, one of the best ways to measure your financial advisor’s worth is to track your portfolio’s return on investment and compare it to the overall market’s growth. After all, if you’re paying someone a fee to provide financial advice, they should be able to get you a better return than the market average, which you can obtain at lower cost via a passive index fund. Online statements usually include portfolio returns minus fees, along with the capability to see how much your investments have grown over the past month, quarter, year, or other time period of your choice.

To cut through the confusion, here are questions to ask when hiring a financial advisor, from the SEC¹⁸ and Wall Street Journal:¹⁹

• What services do you provide? How often will we talk?
• What are your credentials?
• Are you a fiduciary, meaning you have a formal commitment to put clients’ interests ahead of your own?
• How do you get paid – by the amount of assets you manage, by commission, or by another method?
• What are the total fees to purchase, maintain, and sell the investments you recommend?
• What are the ongoing fees to maintain my account?