What Does A Financial Advisor Do And How Are They Paid?

Most people know of the existence of a class of professionals known as “financial advisors,” but it seems as though there are a lot of misconceptions about what exactly they do and don’t do. So exactly what does a financial advisor do? Well, that depends. A financial advisor can provide you with varying levels of service depending on your personal needs and preferences. There are also different methods of collecting fees for different types of advisors. It is important to take a look at these differences to determine what best suits you before deciding on a planner.

Typical responsibilities of a financial advisor include forming an extensive financial plan that encompasses all aspects of your finances from retirement investing to life insurance to estate planning and beyond. They can also take care of just a single aspect of your finances, like setting up a college fund for your child or grandchild, for example. This is referred to as modular planning. On the other hand, if you are someone who prefers to keep your finances in order on your own, they can simply look over your plan and give you a second opinion to ensure that you are on the right track.

Financial advisor fees can be entirely commission-based, asset-based,  fee-only, or some combination of the three. Commission-based planners profit by selling you specific products and services. The potential problem with this type is that it encourages planners to promote certain products over others due mostly to the size of commission involved and not necessarily always what’s in your best interests. Asset-based advisors, on the other hang, collect a fixed fee based on a percentage of your assets. If your account balance doubles, so does his fee. This helps align our advisor’s interests with your own, at least on the surface; however, this type of arrangement can potentially lead to an advisor taking on far more risk than is prudent in an attempt to boost his own income. Fee-only financial planners generally charge by the hour or by the job (i.e. a fixed $3000 fee for an asset allocation plan), which reduces the threat of conflicts of interest. Some may be mostly fee-based and still earn a commission on certain products or services, but fee-only is becoming the more widely used method. All else being equal, most investors should prefer fee-based financial planners due to their lower overall costs and lower exposure to conflict-of-interest issues.

Of course, there is no one specific numerical answer to the question, “How much does a financial advisor cost?” Some planners may charge you by the hour while others will charge by the value of the plan. A typical hourly range is anywhere from about $120 to $250. A typical asset-based fee can range anywhere from 0.75%-1.5% of assets depending on the account balance, although there are many who charge more and a select few who charge less. Those who charge hourly are often willing to prioritize action items, allowing you to pay for them one at a time rather than paying a gigantic lump sum up front.

Financial planners are there to offer you sound and experienced investment advice. With any form of investing, risk is always involved. Financial planners cannot see the future and should not make you unrealistic promises. They simply do their research, follow trends, and learn from years of experience to help you secure and grow your hard-earned funds.