Financial advisors offer invaluable guidance. Their fees can, however, eat into your hard-earned savings.
Typically, financial advisors charge between 0.25% and 1% of assets managed. However, fees vary according to the level of service provided and the firm. For example, some advisors may charge between $200 and $500 per hour or a retainer of $7,000 or more per year. In other cases, sliding scale fees are used, with higher asset levels qualifying for lower fees. There may be a flat fee of $7,500, while there may be an hourly rate of $120 to $300.
Keeping advisory costs low is crucial whether you’re just getting started with investments or just looking for a checkup. Here, we provide comprehensive strategies to assist you in saving on advisory fees and improving your financial well-being.
Understanding Advisory Fees
In order to determine how to cut your costs, let’s first examine the different types of fees you may encounter:
- Asset-based. Clients pay a percentage of their assets under management, often in a tiered system. Financial advisors usually charge this kind of fee.
- Commission. Fees are earned by advisors when a trade or transaction is executed.
- Fee-only. As opposed to commission-based services, fee-only services charge per service.
- Hourly fee. It is not uncommon for financial advisors to charge an hourly fee for their services.
- Flat fee. A flat fee advisor typically offers a specific service for a set fee. It is also possible in some cases to combine flat fees with commissions.
- Performance-based fees. Depending on the benchmark, some advisors may charge extra if their service exceeds it.
Generally, the traditional 1% fee includes asset management services and an annual financial plan update. Some firms offer tax planning for free, but others charge clients for everything tax-related. The same applies to legal services.
Strategies for Saving on Advisory Fees
Now that we’ve cleared that up, let’s consider ways to reduce advisor fees.
1. Educate yourself.
Understanding finances is essential to lowering, if not eliminating, advisor fees. Best of all? Whatever stage of your financial journey, there are many ways to improve your financial literacy skills.
- Keeping up-to-date with financial news and expert insights by subscribing to reputable financial newsletters.
- You can listen to financial podcasts while commuting, exercising, or doing household chores.
- Learn in-depth information about personal finance by reading books.
- Engaging with financial experts and communities on social media.
- Keeping track of your income and spending to manage your finances better.
Don’t forget also to take advantage of free educational resources from reputable institutions, such as the National Endowment for Financial Education.
2. Consolidate your accounts.
Is your checking, retirement, and investment portfolio spread out across several accounts? If so, you might want to consolidate everything.
This will make it easier for you to manage your finances. After all, your records will be streamlined, so you won’t have to sort through many statements and tax forms. As a result, monitoring will take less time, and you’ll get a better sense of the big picture.
Additionally, this can also reduce fees.
If you invest through multiple providers, you may end up paying more fees, transaction costs, and mutual fund expense costs than you need to. The more assets you have with one provider, the more chances you have to reduce or eliminate account fees and invest cheaply.
3. Do your homework.
Not all advisors are the same. As such, find out what their fees are, what their investment philosophy is, and how experienced they are. Ideally, you should choose an advisor who offers a fee structure that matches your needs and assets, such as hourly fees, flat fees, or a percentage of assets managed.
In addition, you should take into account the following:
- Research qualifications. Find a financial advisor with relevant certifications (CFP®, CFA®, etc.) and experience in the specific area you need help with, like retirement planning or estate planning.
- Compare fees. Obtain quotes from several advisors and compare their fees.
- Check online resources. Use platforms such as the National Association of Personal Financial Advisors (NAPFA) directory to find fee-only advisors who do not receive commissions for selling products.
4. Look for fee-only advisors.
Advisors who charge a fee only have a fiduciary duty to act in your best interests. Why? They are compensated solely by the fees you pay them. As a result, they’re less likely to push products that give them commissions.
Moreover, when advisors are paid to provide advice rather than sell products, they are likelier to devote more time to it. So, you’re getting more bang for your buck.
If going this route, though, ensure the advisor is a fiduciary.
5. Investing the DIY way.
The whole point of DIY investing is that you manage your own portfolio. In other words, you choose the investments, make the trades, and determine whether your money grows or shrinks.
Before making this commitment, here’s what you need to know about DIY investing:
- Pros. By using discount brokers, you can save on fees and tailor your portfolio based on your goals.
- The cons. Learning about investing and making informed decisions requires research and a time commitment. Losses are also your responsibility.
Is DIY investing right for you?
Here are some additional factors to consider:
- Investing goals. Would you like to save for retirement, a down payment on a house, or something else?
- Risk tolerance. What is your comfort level with the possibility of losing money?
- Your expertise and knowledge. What is your knowledge of investing?
Getting started with DIY investing.
Here are some steps to take if you decide to try DIY investing:
- Learn as much as you can. Many resources are available online and in libraries to help you learn about investing basics. You can also return to our first point about improving your financial literacy.
- Open an investment account. Select a discount broker with low fees and a user-friendly platform, such as E*TRADE, TD Ameritrade, or Robinhood.
- Develop an investment plan. Decide how to allocate your assets. This means that based on your goals and risk tolerance, you’ll decide how to invest your money between stocks and bonds.
- Diversify your portfolio. Don’t put all your eggs in one basket. You can reduce your risk by investing in various asset classes, including stocks, bonds, mutual funds, and ETFs.
6. Utilize robo-advisors.
A robo-advisor is a computer-based service that helps you select, monitor, and manage your investments. Among the most popular examples are Betterment, Wealthfront, Vanguard, and Acorns.
For those interested in investment management, robo-advisors are an ideal low-cost option. After all, they will build and manage investment portfolios based on their goals, timeframes, and risk tolerances. Additionally, Robo-advisors usually don’t require any or a low account minimum, so beginners do not have a hard time getting started.
Most robo-advisors also charge a fee of 0.25 to 0.50% based on the assets under management (AUM).
The downside is that robo-advisors don’t typically offer customized financial plans or personalized investment advice.
7. Work with limited service advisors.
In comparison with full-service advisors, these advisors provide specific services, such as portfolio reviews or retirement planning, at a lower cost. Furthermore, they can offer advice on how much to save, what type of insurance to buy, and what to do with property and taxation.
Overall, since you handle your investments, but the advisor provides guidance and direction, they charge less in advisor fees.
8. Always negotiate fees.
It is easy to assume that fees are set in stone. However, many advisors, especially those who handle larger accounts, have flexible fee structures.
Therefore, it is important to discuss your financial goals and budget openly. It is also a good idea to research average fees for similar services to counter their initial proposal.
Further, be prepared to explain why you feel the price is too high and why the advisor should take you on as a client for less than their usual fee. You may also be able to negotiate for a lower fee if you like the advisor but want fewer services than they usually provide.
Just note that investment advisors can discount or negotiate a fee schedule before signing an investment advisory agreement (IAA). Unless you sign a new contract, the fee is locked-in once you sign the IAA.
9. Find out if there are any fee waivers or discounts available.
For several reasons, a client’s account may be discounted or credited a set amount. At the end of the period, the advisor will deduct the dollar amount from the client’s fee.
It is not uncommon for advisors to waive or discount their fees for young investors, military personnel, or to extend a fee discount to prevent you from going elsewhere. Before choosing a full-cost program, exploring these options is a good idea.
10. Leverage free resources.
Many reputable institutions offer free financial information and tools. The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) offer many educational resources.
Moreover, libraries offer investment guides and financial planning books with only a library card.
11. Put financial planning services to use.
As with robo-advisors, these services operate online. However, they function more like traditional financial planners. In addition to investment management, they may provide full-service, customized financial planning. In contrast to traditional financial advisors, you can do that planning virtually, via phone or video conference.
These services, like Betterment Premium, offer robo-advisors with a human element, including computer-managed portfolios and access to financial advisors for advice and guidance. Other companies, such as Empower and Facet Wealth, provide each client with a dedicated certified financial planner who assembles and plans their investment portfolio.
Ultimately, there are generally fewer costs associated with online financial planning services than with traditional in-person advice.
12. Choose low-cost options.
Look at low-cost index funds and ETFs (Exchange Traded Funds) that track a particular market segment passively. Aside from offering diversification, these funds typically have lower expense ratios than actively managed ones.
In case you didn’t know, an expense ratio is the amount you pay a mutual fund or ETF per year expressed as a percentage of your investments. As a result, if you invest $5,000 in an ETF with a .04% expense ratio, you will pay $2 a year to the fund.
In short, these investing options are more affordable for investors. In addition to being less risky, passive funds are also more stable, since they are not actively managed.
13. Take advantage of employer-sponsored programs.
Many companies offer financial wellness programs, allowing employees access to financial advisors or discounts on services. If you are eligible for these programs, you should explore them first before seeking external assistance.
14. Consider a hybrid approach.
Consider DIY investment strategies combined with limited service advisors. At key points, you will receive expert guidance while saving on ongoing fees.
15. Don’t just focus on costs, but also on value.
The most important thing is to choose an advisor who aligns with your financial goals and investment style. A qualified advisor can save you money in the long run by optimizing your portfolio and minimizing taxes.
16. Regularly review fees.
Fees can quickly mount up and become an ever-growing expense if you don’t control them. As your assets grow, reviewing your advisor’s fees periodically is important.
You should also compare them to current market rates to ensure they remain competitive.
Beyond Cost-Cutting: Choosing the Right Advisor
While cost is an important factor, selecting the right advisor goes beyond fees. You should also consider the following factors:
- Qualifications. Find an advisor who is a Certified Financial Planner (CFP®) or a Chartered Investment Counselor (CIC).
- Experience. An invaluable asset is the ability to work with clients with similar financial goals and risk tolerance.
- Investment philosophy. You should ensure that the advisor’s investment style matches your risk tolerance and needs.
- Communication style. Ensure your advisor communicates, explains financial concepts clearly, and responds quickly to your questions.
Conclusion
When it comes to your financial journey, financial advisors can be a valuable asset. Remember, though, that you are responsible for your financial future. Your financial goals won’t be compromised if you understand advisory fees and use the abovementioned strategies.
Don’t be afraid to ask questions or negotiate fees to become a more informed investor. You can free up significant funds for your future by investing a little effort.
FAQs
What are the different fee structures?
Advisors can charge a percentage of assets under management (AUM), a flat fee, or an hourly rate.
What’s the average cost?
The average fee is around 1% of AUM per year, but it can vary depending on the firm.
Do I need a full-service advisor, or can I use a robo-advisor for some tasks?
With robo-advisors, investing is automated, and fees are lower.
Should I choose a fee-based or commission-based advisor?
A fee-based advisor is typically more aligned with your interests since their pay is not tied to product sales.
Can I negotiate the fee with an advisor?
Absolutely!
In order to obtain a lower fee, it is important that you describe your situation and why it is necessary.
Are there ways to reduce the services I use to lower the cost?
You should discuss your needs with the advisor. You may not need all of the services offered in their standard package.
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