How to Lower Your Financial Advisor Expenses

Hiring an advisor earlier on in your financial planning journey can benefit you in several ways. The professional financial advice they provide you along the way can help you reach your personal and financial goals faster. The advisor can also help you create a well-diversified investment portfolio, plan your expenses and liabilities, and also help you manage your overall finances smoothly.

However, while hiring a financial advisor has several benefits, you need not spend a fortune on hiring a financial advisor. Advisors have different fee structures where you can hire their services on an hourly rate, a retainer basis, or the assets under management (AUM) model where the advisor is paid a certain percentage as fee based on the amount of assets managed by him on behalf of his clients. If you wish to find out about the different fee models used by advisors to charge fees, you can consult with a professional financial advisor and enquire about the same. 

In this blog, we will find out the steps you can take to lower your financial advisor fees. Before that, we will also discuss the average financial advisor fee.

How much does a financial advisor cost?

The average cost of hiring a financial advisor depends largely on the kind of financial advisor you are hiring. The cost of doing so also depends on your requirement, corpus size, investment horizon, and the fee structure used by the financial advisor. For example, some financial advisors charge a rough percentage of the total assets they manage, while others have a fixed rate. Generally, the average financial advisor fee is 1-1.05% of the total assets they manage. For instance, if a financial advisor manages an investment corpus of $5 million, a 1% per annum fee will fetch the financial advisor $50,000 in a year. On the other hand, if the financial advisors charge a flat rate, it can range from $5,000 to $50,000 based on their experience and requirements. The final cost also depends on the scope of the financial advisor’s work. Financial advisors may charge extra for active management and lower for passive management of the investor’s portfolio.

How to lower your financial advisor expenses

Although hiring a financial advisor is a move that will reap benefits, it need not cost a fortune.

Here are a few tips you can keep in mind to help lower your financial advisor fees:

1. Understand how the financial advisor is paid

Start by understanding how your financial advisor is getting paid. For example, some advisors are paid via commissions on the sale of financial products like stocks, mutual funds, policies, etc. On the other hand, there are advisors who accept an annual retainer fee or a per annum percentage of the total assets they manage or an hourly fee for their services. Some may charge a flat fee for simply making a financial plan that you may need to follow.

Thus, it is important to understand how a financial advisor charges a fee. This will be the first stepping stone to understanding how you can bring the expenses down when hiring an advisor.

2. Assess how much of your financial planning you can handle yourself

Although financial advisory services may not always be very economical, its benefits, more often than not, may outweigh the expenses. However, you can take some matters into your own hands to reduce the expense. For example, hiring a financial advisor for active management of your investments can cost you more. Active financial advisors will track your investment portfolio continuously and make buy and sell decisions regularly to ensure that your portfolio stays in the green. They will make decisions by weighing each factor in detail, studying the market and the economic environment, to ensure optimal performance of your portfolio.

On the other hand, passive management will cost you less compared to active management due to no active involvement on the part of a financial advisor. However, this does not undermine the importance of passive financial advisors. In passive management, you may have to do some heavy lifting yourself. For instance, a financial advisor can help you chart a plan to manage your finances and investments, but you may have to implement them independently.

This will result in you being more actively involved in day to day management of your own finances and also help lower the financial advisor fees.

3. Consider hiring a fee-based financial advisor

A fee-based financial advisor states their charges in advance, which can either be a flat annual retainer or an hourly rate. However, in situations wherein the financial advisor makes active decisions about what investments to buy and sell, the average financial advisor fee can be higher.

A commission-based financial advisor earns a commission based on the financial products they sell. For example, if they sell a certain insurance product to you, they might be getting kickbacks from the insurance company for making the sale. Using a fee-based financial advisor is advantageous since they do not earn any commission and are not motivated to sell you products.

4. Ensure that the financial advisor is bound by fiduciary duty

A fiduciary refers to an individual who acts in your best interests at all times and is legally bound to place your interests before their own. Financial advisors bound by fiduciary duty will not try to sell you financial products that benefit them monetarily. Commission-based financial advisors, on the other hand, are not bound by fiduciary duty and may try to sell you financial products.

Hiring a fiduciary financial advisor will not only keep your expenses in check but also help ensure that you engage with an advisor who you can trust to act in your best interests at all times.

5. Do not hire the first advisor you interview; instead, research all of your prospects

When you know what kind of financial advisor you want, what your requirements are, what your budget is, and what you would like to pay to a financial advisor, you can start researching your options. Interview your prospects and ask them about their credentials, certifications, what kind of fee model they use and if any complaints have been filed against them. Check for reviews and see what their past clients have to say about them. This way, you can hire an advisor who is credible and has good experience, besides being cost-effective.

Try not to settle for the first financial advisor you come across. Take your time to research financial advisors until you find someone who checks out all the boxes and is financially affordable too.

6. Avoid paying commissions upfront to advisors

When you come across financial advisors that ask for commission upfront, it may be a sign that they will cost you a lot. These are sales commissions, and hence, these financial advisors will try to sell you such products. Try to avoid such financial advisors who ask for commissions upfront to reduce your financial advisor expenses.

7. Consider negotiating with the advisor if required

Lastly, the one thing that you can do is negotiate. Explain to the advisor why you think their charges are high and why they should charge you a lower fee. Negotiate with them and try to come to a solution where you both are happy with the mutual arrangement and no party feels hard done by.

To summarize

Hiring a financial advisor can be a cumbersome task. However, you should not compromise on quality in lieu of saving a few dollars. Try to find a solution wherein you get quality financial advisory services at an affordable fee. The right mix would be an advisor with good qualifications, experience and someone who is not unduly expensive.

Use the free advisor match tool to match with experienced and certified financial advisors who will be able to guide you effectively on reaching your financial goals at an affordable fee. Give us basic details about yourself, and the free match tool will connect you with 1-3 professional financial fiduciaries that may be suited to help you.