12 Things to Consider Before Hiring a Financial Advisor

Your financial advisor earns compensation in a number of ways, sometimes combining several methods at once. One of the most common compensation structures is a percentage based on assets under management. If your advisor managed, say, $1 million of your assets in 2021, you may have been charged a fee of $1.02% on that amount, according to a report by Advisory HQ News Corp. The more assets under management, the lower the percentage. The percentage fee is usually in the neighborhood of 0.59% to 1.18% annually of the total assets being managed.

If you go to an advisor for a one-time consultation to craft a financial plan or other project, you may be charged hourly for the service. Each financial advisor sets a different amount, but charges typically range from $120 to $300 an hour.

Some advisors charge a fixed fee for their services, which include everything from managing your assets to developing a financial plan. If your investment portfolio is under $499,000, your fixed fee may be $7,500. A much larger portfolio of $7.5 million in assets will cost up to $55,000 to manage.

Your advisor may sell certain financial products from which they receive a commission on the sale. They may also earn a commission on a financial transaction. Just be sure that when selling a commission-based product, your advisor is putting your interests above their own. It is their fiduciary duty to do so.

Your advisor may set a benchmark for portfolio performance. If he or she reaches that goal, an additional fee may be charged.

Advisors may invest your account in a mutual fund or an exchange-traded fund. In that case, you are responsible for any costs associated with those funds. Brokerage, custodial, and other third-party fees may be assessed.

Financial advisors frequently offer services beyond financial management. They may also provide tax advice or insurance planning for free. On the other hand, you will be charged for those extra servicer if they are not part of your basic service. Ask about other sources of compensation you may be charged. Some advisors partner with tax, legal, or insurance experts, and that firm may bill you.

Robo-advisors are a good option if you are starting out and don’t have much money to invest. Your fee will be between 0.25% and 0.89% of AUM, much lower than a traditional advisor. The drawback is you won’t be dealing with a human, which can be frustrating. Robo-advisors may not offer the same scale of financing expertise, including estate planning and insurance topics, as a traditional investor. Those with more complex finances or larger sums to invest should probably opt for a traditional advisor.

To find how much you will be charged, review the firm’s Form ADV, a Securities and Exchange Commission requirement. It will detail in Section 5 each compensation method. Another place to look is Part II of Form ADV, the firm’s brochure. There, you can get a better understanding of how the advisor calculator fees and additional sources of revenue.

Looking at SEC documents provides a detailed picture of what you will be charged. But ask your potential advisor, too. He or she should explain their fees to you in clear, understandable language. If you are confused or the advisor blows off the question, take your business elsewhere.

Fees based on the percentage of assets under management are higher the less you have to invest and lower the more valuable your portfolio is. If you do not have a large investment portfolio, a robo-advisor would be the more affordable avenue. In general, fee-only and fee-based structures are the most common. Looking for a simple optio with less conflict of interest? Go for a fee-only structure. And do not be afraid to haggle for a better fee.

Ask friends or relatives for recommendations for a financial advisor. You can also check out SmartAsset’s free tool to find advisors in your area. The ultimate decision will depend on your face-to-face meeting. Interview the advisor on their fee schedule and all sources of compensation. Learn the firm’s investment philosophy to understand if it matches up with yours.

Just like you would get a second opinion from a doctor on a medical issue, you should meet with several advisors before making a decision. Who do you feel most comfortable with? Who is giving you the best advice? Does it match your goals? Choose the one best suited for your financial situation.