Many people hesitate to consult a human financial advisor because they feel they don’t have enough assets. Historically, this concern was valid. Many advisors prioritized clients with substantial wealth due to high minimum asset requirements. While this is still common, more advisors today are finding innovative ways to serve smaller accounts efficiently.
[Sign up for stock news with our Invested newsletter.]
Whether you’re navigating student loans after college, exploring financial independence through the FIRE movement, planning to launch a business with an inheritance, or tackling milestones like marriage or buying a home, professional guidance can be invaluable. Early planning often has the greatest impact on long-term financial success.
As an up-and-coming investor, here’s what to consider when choosing a financial advisor:
— How much will a financial advisor cost?
— Are there other fees I should anticipate?
— What specific services do I need?
— Does a fiduciary advisor provide better advice?
— How can I find an advisor that fits my needs?
— What else should I consider when choosing a financial advisor?
— What key questions should I ask a prospective advisor?
How Much Will a Financial Advisor Cost?
A fee-based financial advisor or robo advisor platform typically charges for their advice based on a percentage of the assets they manage for you. However, as the financial industry evolves to address the diverse needs of clients, many advisors are also offering flat, project-based or hourly fees.
Assets Under Management (AUM)
AUM fees are calculated as a percentage of the assets managed on your behalf and are deducted directly from your accounts. The average AUM fee is slightly over 1%. Smaller accounts may pay higher rates, often as much as 2% annually, but these fees can decrease as the account value rises. For example, with an AUM fee of 1.5% on $150,000 of managed assets, you would pay $2,250 per year. As your account value fluctuates, your advisor will periodically recalculate AUM fees to reflect the fluctuations in your account value.
Flat Fees (Including Project-Based or Hourly Rates)
Flat fees are becoming increasingly popular, particularly among smaller investors. Flat fees offer predictability and may be more appealing to investors who want specific services without tying fees to their account size. Sample fees might include:
— Stand-alone financial plans: $1,000 to $3,000
— Annual retainers: Up to $7,500
— Hourly rates: $200 to $400
It is essential to ask prospective advisors about their fees. All fees — whether based on AUM, flat rates or other methods — must be detailed in the advisor’s Uniform Application for Investment Advisor Registration, commonly referred to as Form ADV.
A stellar advisor will address your questions openly and transparently. They will also provide specific dollar amounts in addition to percentages to help you understand the total cost of their services. No matter how reputable your advisor, it is important to review your account statements regularly to ensure charges align with those outlined in Form ADV. Errors can occur.
Advisors may also be compensated via:
Commissions
Some advisors are paid by the product vendor rather than by billing you directly. While you may not see a separate invoice for these services, the product’s pricing includes the advisor’s fee.
Hybrid Fees
Some advisors have the flexibility to charge fees to some clients and receive commissions from others. However, they are prohibited from charging both a direct fee and a commission for the same recommendation. These advisors must take extra care to clearly explain their compensation structure so that you always know who is paying for their services and how those payments might influence their recommendations.
Are There Other Fees I Should Anticipate?
Beyond advisor fees, investment products themselves have costs, often called expense ratios. These fees cover the operational costs of mutual funds, exchange-traded funds, or other products and are disclosed in your account paperwork. A client is not paying twice for the same benefit; rather, they are paying all parties to the transaction.
Product fees are added to the advisor’s fee to determine the total fee. For example, you may pay a 1% advisor fee and a 1.5% product fee, for a 2.5% total fee. The advisor’s fee is payable for as long as the client has a relationship with the advisory firm. The investment product fee is only payable for the time period that the client has the product in their portfolio.
What Specific Services Do I Need?
As a smaller investor, your needs may differ from those of more affluent investors, but you still deserve the same high caliber of service. For example, smaller investors typically need an initial financial plan outlining goals, cash flow and investment recommendations. You may also require ongoing guidance for major milestones (e.g., buying a home, managing debt). It is important to understand that some advisors will include these services in their fees, while others charge separately.
Does a Fiduciary Advisor Provide Better Advice?
A fiduciary is legally obligated to act in your best interest. While this sounds ideal, fiduciaries and non-fiduciaries can both provide excellent advice. A recent, high-profile court case underscores the uncertainty many investors experience in understanding what is required of different classifications of financial advisors.
In April 2024, the U.S. Department of Labor introduced the Retirement Security Rule, also known as the DOL Rule. The proposal aimed to protect consumers from excessive fees. The bill arose under the Obama and Trump administrations as well; but all have been routinely struck down due to conflicts with other existing regulations.
In the latest version, the DOL Rule would have required all retirement advisors to adhere to a fiduciary standard, the strictest in the industry. A fiduciary standard demands that all conflicts of interest between the advisor and client be eliminated or fully disclosed.
At the core of these proposals lies a debate within the financial services industry about compensation transparency. One faction assumes that all commissioned sales inherently create conflicts of interest. However, even non-fiduciary advisors are held to strict regulatory standards of conduct. While fiduciary advisors are required to prioritize their clients’ best interests, this standard has its own limitations:
— Fiduciary standards are not foolproof. Even fiduciary advisors can engage in misconduct. For example, Bernie Madoff operated the largest Ponzi scheme in history, defrauding investors of $64.8 billion over 17 years, despite being a fiduciary who was trusted by both clients and regulators.
— Fiduciary standards are not free from conflicts. Under the AUM fee model, advisors earn more as client assets grow and less when assets decline. This structure could discourage advisors from recommending large purchases or insurance solutions that might reduce managed assets. Additionally, during market downturns, advisors may face increased client demands just as their income decreases.
Client confidence in their advisors is essential for the health of the financial industry. While stronger regulations aim to protect consumers, they will not deter unethical advisors who already neglect client interests. Instead, heightened compliance requirements may make it harder to attract and retain quality advisors, increasing costs for clients and potentially creating new obstacles for smaller investors to access professional advice.
Simply focusing on whether an advisor is a fiduciary does not guarantee better outcomes. Fiduciary and non-fiduciary advisors can offer similar advice, depending on their compensation models and incentives. To make informed decisions, investors should ask their advisors how they are compensated and why specific recommendations align with their individual goals.
[READ: 5 Best Free Stock Analysis and Research Tools]
How Can I Find an Advisor That Fits My Needs?
In the digital age, geography no longer matters. As long as an advisor is licensed in your state, they can serve you by video from anywhere in the U.S. Instead of choosing the closest advisor, you can find one that best matches your needs by experience, niche market and expertise, gender, languages spoken and other criteria.
Ask Your Network for Recommendations
Hearing firsthand from someone you know and trust about how an advisor communicates and responds to messages can be invaluable. Your accountant, attorney, insurance agent and even your mortgage broker routinely network with financial advisors as “Centers of Influence.” These referrals are especially valuable because they already understand your financial situation and whether your personalities will mesh. You also may get better service overall because your accountant and financial advisor become a cohesive team.
Use an Online Advisor Search
These databases include financial advisors who work with smaller clients and often cater to younger generations. Most advisors on these platforms trend to AUM or flat-fee compensation schedules.
— U.S. News & World Report. This online database of financial advisors is searchable by location and firm name, and it provides details on specialties and experience.
— National Association of Personal Financial Advisors (NAPFA).
— XY Planning Network (XYPN). These advisors specialize in next-generation investors.
— The CFP Board. This network includes all advisors who have earned the certified financial planner, or CFP, professional designation.
Match Online With an Advisor
You can go online to find many free services that connect financial advisors directly with new clients. While an internet search for “financial advisor near me” will bring innumerable options, the downside is that your information will likely go to multiple advisors. If you prefer a fee-only advisor, include the word “fiduciary” in your search terms.
Consider a Robo Advisor
Many banks and online brokerages are offering cost-effective online automated portfolio management services and financial planning. While these services may initially seem less expensive than human advisors, the least expensive fees are for basic, standardized services. Fees will increase for more personalized assistance.
What Else Should I Consider When Choosing a Financial Advisor?
The U.S. Bureau of Labor Statistics recorded 321,000 financial advisors in 2023, a daunting number to winnow down to find the right advisor for you. Consider these factors:
Firm Size
Financial advisors can be a solo operation, a small boutique practice or associated with a practice consolidator, resulting in a much larger firm footprint overall. Larger firms
may offer a broader range of services and have some economies of scale. However, smaller firms may be able to offer a higher degree of personalization and familiarity that is comforting to a newer investor.
Credentials and Expertise
Professional designations signal that an advisor has completed advanced education and passed challenging exams in various specialties.
Niche Market
Many advisors are willing to dive deep into a smaller pool of clients in order to provide highly customized services. Niche practices can be managed profitably, enabling them to focus more on the individual, rather than the account size.
Online Presence
Websites and social media profiles can tell you a lot about an advisor. Does the website tell a positive story of the advisor’s investment philosophies, firm values, and the team’s background and experience? A current profile picture and engaging content builds rapport and trust. Your financial relationship with an advisor is as intimate as your relationship with your doctor, so understanding them as an entire being is invaluable to building an enduring relationship together.
Demographics
The industry is still heavily weighted toward Caucasian men, but more women and minorities are entering the field. Advisors are also focusing on specific populations, such as LGBTQ+ and neurodiverse clients.
Regulatory Record
Advisors must disclose personal bankruptcies, criminal history and all disciplinary actions. Details are available in the SEC database called Investment Advisor Public Disclosure or the Financial Industry Regulatory Authority database called BrokerCheck.
What Key Questions Should I Ask a Prospective Advisor?
An astute advisor should not rush you when it comes to answering your questions in simple language and without jargon. While most of the information will be in Form ADV, these questions will set you on the right path:
– What types of clients do you typically serve? – What services do you provide to clients with smaller accounts? – Do you have a niche, or any special expertise? – How often will we meet? What other communication will I receive? – How much will I pay for your services (in dollars)? – Are you a fiduciary? Can you receive a commission? If yes, how will you differentiate commissions and fees? – Will I work directly with you or someone else in your firm? – What other professionals can you bring to the table to address all my needs? – Will the person who referred me get any form of compensation from us working together?
Finally, ask: “Am I a good fit for your practice?” This ensures the advisor is confident in serving clients with your needs and account size.
Takeaway
No matter your financial situation, professional advice is accessible to help you build a secure future. By asking the right questions and understanding your options, you can find an advisor who aligns with your future goals and current budget.
More from U.S. News
Strategic Technology Trends in 2025
5 ETFs That Outperform the S&P 500
5 Best Invesco ETFs to Buy Now
How to Find a Financial Advisor If You’re Not Rich originally appeared on usnews.com
Update 11/25/24: This story was published at an earlier date and has been updated with new information.
