How Does a Financial Advisor Get Paid? Should You Use One?

If you’re new to the world of investing, you’re probably wondering whether you need the help of a financial advisor. Here’s the truth: Even the most seasoned investors find value in having an investment professional guide their overall financial plan.

According to a Ramsey Solutions research study, 44% of people who partner with a financial advisor have $100,000 or more saved for retirement, while only 9% of those who fly solo have that much saved. With such a huge difference in results, why would so many folks not hire an investment professional?

Well, people find investing intimidating for many reasons. One of those fears includes putting their trust in the wrong people for guidance. We know it’s hard to understand how investing works, how financial advisors are paid and what you’re getting for your money. But we also know that successful investors work with financial advisors they trust.

It’s important for you to learn the different ways an advisor can get paid. That way, you can ask the right questions—and keep asking them until you find the right advisor for you. Let’s dive in!

How Does a Financial Advisor Get Paid?

Financial advisors are usually paid in one of the following ways:

Commission-Only

If you work with an advisor who only charges a commission, you’ll pay the commission up front as a portion of the money you invest. For example, suppose you have $5,000 to invest. Your advisor recommends a fund that charges a 5% commission. So you pay $250 as the commission and invest the remaining $4,750.

Fee-Only

Fee-only advisors can charge an hourly fee, a flat fee or a retainer fee (more on these later). These advisors are usually self-employed or part of a Registered Investment Advisors (RIA) firm and don’t officially represent any financial services company. The fee you pay is based on their financial advice or ongoing management of your investments. The fee might be arranged in one of the following ways:

Hourly fee:

In this arrangement, you pay for the time your advisor spends with you or working on your case, typically an amount per hour. The fee is separate from your investments and usually works best for people who only need specific advice on a few investing topics.

Flat fee:

If your advisor charges a flat fee, you’ll review a selection of services your advisor offers and choose the ones you need. For example, you might pay a flat fee of $2,000 for a bundle of services that includes an analysis of how much money you’ll need for retirement and a plan to get you there. As with the hourly rate, this fee isn’t tied to your investments.

Retainer fee:

If your advisor charges a retainer fee, you’ll pay a fee up front for an estimated amount of services or time. For example, if your advisor charges a $1,000 retainer fee at $125 an hour, the retainer covers eight hours of your advisor’s time—no matter what services you need. Your advisor will bill you for any additional hours. But if the service you requested only takes your advisor four hours, you could receive a refund of the remaining $500 retainer amount. The retainer could also be calculated based on a percentage of your investment (such as 1%). Or the percentage might be based on either your income, your net worth, or both.

Commissions and Fees (Fee-Based)

Fee-based advisors charge a combination of fees and commissions. For example, suppose you sit down with a fee-based advisor to invest $5,000 in your Roth IRA. For $200 per hour, your advisor develops a detailed investing plan for you. That plan includes a mutual fund that charges a 3% commission—meaning you’ll pay your advisor $150 and invest the remaining $4,850. For at least eight hours of work, you’ll pay the advisor a combined total of $1,750.

Market chaos, inflation, your future—work with a pro to navigate this stuff.

$200 x 8 hours + $150 commission = $1,750 combined total fee

Which Type of Fee Is More Common?

There are many different ways to pay financial advisors, so one way isn’t more common than the others. That’s why you should familiarize yourself with the ones mentioned here so that you have a basic understanding of what you may see as you look for a financial advisor.

How Do I Know if Their Fee Is Reasonable?

You can feel confident that you’re paying your financial advisor a reasonable fee if it falls within the average price of the market. Of course, knowing this amount can be a challenge because the range you pay will be based on your location, your investment amount, and the complexity of your financial plan.

Here’s an average breakdown of what those costs could look like for each of the ways advisors are paid:

• Commission: The average commission is based on a percentage of your investment in a fund, which falls between 3–6%.
• Hourly fee: The average hourly financial planner fee ranges between $120–300.
• Flat fee: The annual flat fee for a financial plan can be as low as $500 to more than $10,000, depending on your net worth, where you live, the services you’re using, and how many assets your advisor is managing for you.
• Retainer fee: The average annual financial planning retainer is between $6,000–11,000 or a percentage of the assets under management with your advisor, usually somewhere between 0.5–2%.¹

Investing fees are confusing, so a good advisor will understand if you have questions. They should be happy to clarify any confusion. That way, you understand what you’re paying for and what you’re getting for it. You should never put up with an "advisor" who can’t or won’t answer your questions. And never work with anyone who loses their patience with you.

Is a Financial Advisor Worth It?

You’ve probably asked yourself, Why shouldn’t I just manage my investments myself and skip paying an advisor?

That’s a great question.

For you to reach the same results an advisor could achieve, you would have to choose the same investments as an advisor, make the same decisions about that investment, and keep the investment the same amount of time as an advisor would recommend.

Here’s another problem: When a person goes it alone, they usually allow emotion to rule their investing decisions. As a result, they overreact in market downturns, selling off their funds to avoid more losses. Then, when the market recovers, they miss out on most of the rebound, buying back their funds after values have gone back up.

Because investors buy and sell at all the wrong times, their average return underperformed the S&P 500 by nearly 2% over the last 20 years, according to the investor behavior research firm DALBAR.² That might not look like a huge gap at first, but after 30 years of investing, that could cost you $300,000 in retirement savings—maybe more. That's not good!

Over the long term, the right financial advisor is probably going to make you more money. They can’t promise to outperform the market. But their process of picking investments, keeping investments, and keeping you on track will give you more consistent long-term growth than the vast majority of investors who try to time the market and aren’t patient enough to hold on to investments for the long haul.

Maybe that’s why 68% of the millionaires we spoke with for The National Study of Millionaires said they worked with a financial advisor to achieve their net worth!

What Does a Financial Advisor Do That I Can’t Do Myself?

One of the biggest value-adds is the comprehensive financial planning a good advisor can bring to the table. Poor decision-making in any financial area can cost an investor thousands of dollars—or even hundreds of thousands—over that investor’s lifetime. The tax savings on the choice to invest in a traditional IRA or a Roth IRA alone can lead to substantially greater savings than an investor could get by working without an advisor.

When you meet with a planning-based investment professional , you can expect them to answer your questions fully—no dodging and no sales pitches. But if you come across an advisor who doesn’t like your questions or is all about guaranteed returns, keep looking.

How Do I Find a Good Financial Advisor Near Me?

How can you find an advisor who will keep you focused on your long-term retirement goals? Family and friends aren’t the best source of investing advice, but they can help by recommending professional advisors they know and trust.

Our SmartVestor program will help connect you with investing professionals in your area who have been vetted by our team and are committed to putting you first and answering any questions you may have.

Once you’ve got a few professionals in mind, take your time and talk with each one—you don’t have to work with the first advisor you speak with! Find an experienced advisor who is a good fit with your personality and who will explain their recommendations so that you can easily understand how they benefit you. Ask questions about fees, how often you will meet about your retirement plan, and how you can contact your advisor with additional questions or concerns.

The right advisor will give you honest answers and will be patient, no matter how many questions you ask.

If you already work with an advisor but you don’t feel like you’re receiving much benefit from the relationship, start looking for a new one. Your retirement is too important to stick with an advisor who’s not living up to their side of the deal.

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This article provides general guidelines about investing topics. Your situation may be unique. To discuss a plan for your situation, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros.