Financial advisors can earn money in various ways. They may be fee-only and get paid exclusively by a client for their services. Other are fee-based, meaning they’re compensated by clients as well ascommissions from selling products or investments.But whether you choose a fee-only or fee-based advisor, the fees will likely be calculated based on the services your advisor provides and the assets they will manage on your behalf. Learnhow asset-based fees work and what you can expect to pay your financial advisor.
Consider working with a financial advisor who has the knowledge to help you grow your portfolio.
What Is an Asset-Based Fee?
An asset-based fee is a percentage fee based on your assets under management, or AUM. Advisors typically charge somewhere between 1% and 2% of the assets they manage. So if you have $100,000, your yearly asset-based fee will likely equal $1,000, $2,000 or somewhere in between. A few factors can influence this figure, including the level of experience your advisor has, the firm they work for and if they receive any commissions.
Asset-based fees often decrease as your assets increase. In some cases, advisors have a graduated scale with benchmarks where the percentage changes.John O’Rourke, vice president of Private Banking and Wealth Advisor at First American Bank, says that the industry standard on accounts of $1,00,000 “falls within the 1% range and gradually declines as the size of the AUM increases.”
O’Rourke says the First American Bank fee schedule starts at 1% up to $3 million in AUM and goes to 0.5% for $10 million and above. Experts typically suggest saving at least $1 million for retirement. But with this fee structure, you’ll be on the hook for paying $10,000 a year to your financial advisor.
Other Types of Advisors and Fees
One percent of your assets might not sound like a lot when you don’t have a lot. Yet the more money you have, the more money you’ll owe your financial advisor.Perhaps that’s why some advisors require you have a minimum asset value before working with you.An advisor may also charge flat fees or hourly rates for certain services. This could be instead of or in addition to an asset-based fee.You may even choose to offer your advisor performance-based fees if they achieve certain returns.
Since fee types and amounts vary so widely, it’s best to shop around and compare your options. There are plenty of brokerages, banks and firms to choose from.And human financial advisors are not your only option. You may want to look into robo-advisors, or automated online investing platforms. Some charge as low as 0.25% of AUM.
If you don’t have the financial means to secure a financial advisor, a robo-advisor with a hands-off approach could be a good solution. Plus, some robo-advisor deals include conversations with a financial advisor for an extra charge. There’s no standard in place and changes based on the company. You can expect to pay anywhere from $100 to $400 an hour depending on your needs and what you’re looking for.
How to Minimize Advisor Fees
Due to their costs, hiring a financial advisor isn’t possible for everyone. There are ways you can cut back when it comes to advisor and firm fees, though.
- Ask upfront: Before you get started with any financial advisor, ask about their fee structure. How much do they charge? Is it a flat fee or a percentage of assets under management? Are they fee-based or fee-only advisors? If they’re fee-based, ask where their commission earnings come from.
- Choose your investments wisely: When you invest in certain securities, like mutual funds and exchange-traded funds, you could incur additional fees. They may seem small at first, but they add up over time. Clarify with your financial advisor whether these fees pass on to you. Better yet, inquire about less expensive investment options that fit your risk tolerance and can help you reach your goals.
- Negotiate: Advisors aren’t one-size-fits-all. Not all of them are the right fit for you or your investment strategy. And since you’re always allowed to change investment firms and financial advisors if you believe you can find a better rate somewhere else, don’t be afraid to ask for a better deal.
Bottom Line
The more assets and money you have, the more beneficial a financial advisor will be. Just remember that your asset-based fees will also rise the more assets you have. Luckily, there are some things you can do to minimize your fees. And a robo-advisor can help you get started if you don’t have a lot of capital. They charge lower fees and rarely have minimums.
Investment Tips
- Only you can decide whether an advisor is worth the fees. If you believe they are, you’ll want to find a financial advisor.Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Consider a few advisors before settling on one. It’s important to make sure you find someone you trust to manage your money. As your consider your options, these are thequestions you should ask an advisorto ensure you make the right choice.
- Before you seek an advisor for investment help, determine how much money you’ll need for retirement. Our retirement calculator will help you see where you stand based on your age, location, monthly savings and estimated retirement expenses.
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As an enthusiast with a deep understanding of financial advisory services, particularly in the context of fee structures and compensation models, I can confidently delve into the concepts discussed in the provided article.
First and foremost, the article highlights two primary compensation structures for financial advisors: fee-only and fee-based. A fee-only advisor is compensated exclusively by clients for their services, while a fee-based advisor receives compensation from clients as well as commissions from selling products or investments.
The central focus of the article is on asset-based fees, which are calculated as a percentage of the client's assets under management (AUM). The standard range for these fees typically falls between 1% and 2%. This means that if a client has $100,000 in AUM, the annual asset-based fee would be in the range of $1,000 to $2,000. The article rightly emphasizes that asset-based fees often decrease as the AUM increases, and some advisors may employ a graduated scale with changing percentages based on AUM benchmarks.
John O'Rourke, vice president of Private Banking and Wealth Advisor at First American Bank, provides insight into a specific fee schedule, indicating that for accounts of $1 million, the industry standard falls within the 1% range, gradually declining as AUM size increases. For instance, First American Bank's fee structure starts at 1% for AUM up to $3 million and decreases to 0.5% for AUM of $10 million and above.
The article also mentions other types of advisors and fees. Some advisors may have minimum asset value requirements for potential clients. Additionally, advisors might charge flat fees or hourly rates for specific services, either as an alternative or in addition to asset-based fees. Performance-based fees tied to achieving certain returns are also mentioned as a possibility.
To cater to a diverse audience, the article suggests considering robo-advisors, automated online investing platforms that often charge lower fees, some as low as 0.25% of AUM. It's pointed out that robo-advisors might have a hands-off approach but could also offer conversations with a human financial advisor for an additional charge.
The article concludes by providing tips on minimizing advisor fees, including asking upfront about fee structures, choosing investments wisely to avoid additional fees, and negotiating for better deals. The significance of understanding the fee structure before engaging with a financial advisor is emphasized throughout.
In summary, the article provides a comprehensive overview of various compensation models for financial advisors, with a particular focus on asset-based fees. It educates readers on how these fees are calculated, their potential variations, and offers tips on minimizing costs associated with financial advisory services.
