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According to a Ramsey Solutions research study, 44% of people who partner with a financial advisor have $100,000 or more saved for retirement versus just 9% of those who fly solo. With such a huge difference in results, why would so many folks not hire an investing professional?
The truth is a lot of people find investing scary for many reasons. One of those fears include putting their trust in the wrong people for guidance. According to Ally Financial, 34% of American workers are scared of not knowing who to turn to for investing advice.(1)
Look, I know it’s hard to understand how investing works, how financial advisors are paid and what you’re getting for your money. But I also know that successful investors work with financial advisors they trust. And if you’re going to reach your dream retirement, you need an advisor you can trust on your side.
"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.
How Does a Financial Advisor Get Paid?
Financial advisors are usually paid in one of the following ways:
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If you work with an advisor who only charges a commission, you’ll pay the commission upfront 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 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:
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.
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.
If your advisor charges a retainer fee, you’ll pay a fee upfront 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 8 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 8 hours of work, you’ll pay the advisor a combined total of $1,750.
$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 is 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 average flat fee for a financial plan ranges between $1,000–$3,000.
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 a "pro" 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.
If you did all that, it’s true you could match the returns the advisor would get and keep more of your money. But 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 individual 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 (7.2% [S&P 500 return] – 5.29% [investor return] = 1.91% [20-year underperformance]), according to the investor behavior research firm DALBAR.(4) 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 okay!
Over the long term, an advisor is 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 could achieve on their own.
Tough Times Prove an Advisor’s Worth
In a market with large gains and little volatility, it’s easy for investors to think they can handle their own investments and stick with a long-term plan without panicking in market downturns. But, as the DALBAR study points out, we don’t always do what we know we should do.
As soon as the stock market takes a dive, investors are tempted to do the exact same thing they did in 2008. Emotions take over and they call their investing agent to say they’re done—they want out right away.
That’s when advisors truly prove their worth. If they can reassure you to stay in the market and keep you putting money in even when it doesn’t feel good, then they have just multiplied your earnings in the future.
What Does a Financial Advisor Do That I Can’t Do Myself?
Jeff Dobyns, investing advisor and long-time SmartVestor Pro, said, "Probably the biggest value-add 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 investing professional like Jeff, 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.
Once you’ve got a few people 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.
"The right advisor will give you honest answers and will be patient, no matter how many questions you ask."
Finding top-notch investing professionals in your area is easy!
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.
About Chris Hogan
Chris Hogan is a #1 national best-selling author, dynamic speaker, and financial expert. For more than a decade, Hogan has served at Ramsey Solutions, spreading a message of hope to audiences across the country as a financial coach and Ramsey Personality. Hogan challenges and equips people to take control of their money and reach their financial goals through national TV appearances, The Chris Hogan Show, and live events across the nation. His second book, Everyday Millionaires: How Ordinary People Built Extraordinary Wealth—And How You Can Too, is based on the largest study of millionaires ever conducted. You can follow Chris Hogan on Twitter and Instagram at @ChrisHogan360 and online at chrishogan360.com or facebook.com/chrishogan360.