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

Good financial advice can help you make better financial decisions, reduce your debt, or cushion your retirement.^1,2 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, so are many people. According to a recent report by the Financial Industry Regulatory Authority (FINRA):³

• More than one in five investors (21%) believe they pay no fees for their investment activities. An additional 17% of investors don't know what fees they pay.
• Among mutual fund owners, 38% did not believe they paid fees or expenses. An additional 15% reported not knowing if they paid fees for their mutual funds.

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.^4,5

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).⁵

Portfolio Value from Investing $100,000 Over 20 Years

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.⁷ Many are Chartered Financial Analysts, a certification that requires passing rigorous exams.^8,9 The SEC, where most advisors are registered – although some have state licenses – provides a lot of background information about specific investment advisors and their firms.¹⁰
• Certified financial planners help clients with planning retirement, managing taxes, choosing insurance, setting up their estates, and meeting other financial objectives.¹¹ The Certified Financial Planner Board of Standards’ website is a hub of information about them.
• Brokers make commissions to execute trades and other transactions.¹² FINRA regulates brokers, and its BrokerCheck Online tool provides detailed information about them.
• Robo-advisors are digital platforms that collect financial information from clients and automatically invest their assets, for fees of up to 0.5% on assets under management.^13,14 Robo-advisors must also be registered with the SEC and can often be found on BrokerCheck as well.¹⁵

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.  

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.¹⁶

Bad financial advice is a different story. For instance, fees and commissions can pose potential conflicts of interest between an advisor and a client. Conflicts of interest can result in financial advisors making recommendations for services an investor doesn’t want or need, or it could result in higher fees.¹⁷ In addition to the federal government’s 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.^18,19

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.^5,14 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.