Paying for a financial advisor
You may have scraped by in your 20s handling your finances on your own. But as you earn more money and your financial situation becomes more complex (mortgages, child/elder care costs, retirement planning, feeding your designer shoe/sports car addiction, etc), you might be asking yourself if it’s worth working with a financial advisor. And maybe more importantly, how do you pay for a financial advisor? Our answer: Yes, depending on their fee model. And we're about to tell you how.
Certain advisors are fiduciaries, which means they are legally required to act in your best interest, AKA not rip you off. But others don’t have that obligation. And with so many different types of financial advisors out there all operating under slightly different titles (advisor, planner, investment manager, the list goes on), it can be hella confusing determining which professional is right for you.
As always, we’re swooping in to translate the jargon and demystify the process of choosing an actual financial advisor instead of a snake oil salesperson.
4 types of fees financial advisors commonly charge
Advisors may use a combination of these types of fees in their overall model, so it’s important you understand each term.
Assets Under Management (AUM)
A payment structure in which the financial advisor charges a percentage of the money they manage for you, typically anywhere from 0.25–1.2% per year. Generally, the more of your money they manage, the lower the percentage they charge. So if you have $100,000 under management and you are charged 1.2% per year, you’ll pay $1,200 in AUM fees. This is one of the most common fee structures used.
Flat or fixed fee
A set dollar amount for services. A financial advisor might charge an annual fee for a set of services, or charge you for a specific, one-time service (like delivering you a financial plan).
Hourly rate
Obvious, but we’ll say it anyway; you’ll pay an advisor a certain amount per hour for their advice.
Commissions
An advisor earns a percentage of any product they sell you or profit they make through investing on your behalf.
3 Common fee models used by financial advisors
Fee-only
Fee-only financial advisors only charge fees; they don’t earn any commission. Because there’s no financial incentive for them (other than doing a great job for you so you refer their name to your friends), they are more likely to be fiduciaries who put your interests first. Keep in mind though, they may charge more than one type of fee, such as AUM in addition to a flat fee.
Commission-only
Commission-only advisors earn income only from products they sell you or investments they make on your behalf. These include financial professionals who sell you insurance or annuity products. Some of them may also provide you with some type of financial planning guidance, but just be aware that they are salespeople first and foremost, and are not necessarily putting your best interests ahead of their own.
Fee-based
Fee-based financial advisors are a mash-up of fee-only and commission-only advisors. They charge one or more types of fees, but they may also earn commissions on products or investments. Because they can earn a commission, it may be harder to tell if they’re working in your best interest or theirs.
Of course, fees aren’t the only thing you should look at when considering which financial advisor is right for you. You’ll want to see proof of a track record of success, and maybe even interview other happy clients before moving forward. This person is going to learn intimate details about your life, like the fact that you make more than your partner or that you have a savings account specifically devoted to growing your vintage Pokemon collection. You’ll want to choose someone you feel reallyyyy comfortable with.
If you’re having trouble finding the right advisor, let us make it easy for ya—check out the Stash Plan today. It’s a fee-only financial plan, delivered by fiduciaries, specifically geared toward millennials.
Stash Wealth provides financial plans designed to assist high earning young professionals build and manage their wealth.
Stash Wealth offers a pragmatic approach to financial planning and wealth management. Whether saving up for Tahiti or a Tesla, we help you achieve your short-term and long-term goals.
Written by Stash Wealth Staff Writer
Stash Wealth Staff Writers are knowledgeable about personal finance topics. Their objective is to unravel the complexities of finance trade jargon, products, and services in order to equip HENRYs with a sound understanding of financial matters.