If you’re interested in working with a financial advisor, it’s important to first understand what one is, and how much hiring one costs. Even seemingly small fees can add up over a lifetime of saving. The actual cost of an advisor can vary widely, because advisors get paid in different ways.

Many financial advisors are skilled and certified financial professionals who can help you come up with a personal plan for your financial life, including saving, investing, insurance, and other forms of planning. Some are called registered investment advisors, or RIAs, who charge fees to manage your portfolio, and are required to work in your best interest. Others are essentially brokers who sell financial products to earn commissions, and are not required to work in your best interest. (You can find out more about financial advisors here.)

However, most advisors are required by law to disclose their fees up front—and detail them on your statements. Let’s take a closer look at the most common advisor cost structures, so you can figure out which one works best for you.

Fee-based advisors

Most fee-based advisors charge you an annual percentage, typically 1 percent to 2 percent, of your assets under management (AUM). So for example, if you have $100,000 invested, and are charged a 2% fee, you’d pay the advisor $2,000 the first year. As your assets grow over time, so does the fee. It’s usually calculated based on the value of your assets on the first of the year. 

The percentage might be smaller if you agree to pay the advisor a bonus if your portfolio outperforms the market. And the rate could be less if you have more money invested.

Flat fee advisors

Some advisors charge a flat fee annually, usually between $1,000 and $3,000. That could be an ongoing fee, or it might be a one-time fee to set up your financial plan, after which you’d pay a percentage of AUM. Other advisors charge an hourly rate for their time, perhaps $100-$300. This could cover all of their work for you, but often hourly rates are for special projects in addition to managing your investments. For example, you might pay a percentage of AUM annually, plus an hourly rate for the advisor’s time helping you set up a household budget or an estate plan.

Commission-based advisors

Commission-based advisors are basically brokers, which means they’re paid by financial companies when they invest your money in their stocks or funds. In other words, you don’t pay them directly, but the financial company. That doesn’t mean they’re free, because the funds they invest in may have high annual management costs, often called “sales loads.”

The rise of robo-advisors

The latest trend in financial advice is the robo-advisor. These are typically internet-based companies that use algorithms and software to automatically manage your investments. You fill out online questionnaires, that help to outline your goals and risk tolerance levels. Then the robots take over, allocating your investments, rebalancing and even optimizing your tax exposure.

Robo-advisors almost always charge a percentage of AUM. But because there’s no human pouring over your investments, the rates are usually much lower—typically 0.25% of AUM. (The actual rate may depend on the size of your nest egg.)

The pros and cons of various cost structures

The interests of registered investment advisors, who charge a percentage of AUM, are usually aligned with your own—not only because they are registered and work as your fiduciary, but the more you earn, the more they earn. However, percentage fees can still take a bite out of your nest egg.

Say you give an advisor $10,000 to invest in the stock market and pay her 1% annually. Assume you kick in another $10,000 every year, and your portfolio produces a 5.6% average annual return. After 30 years, you will have paid your advisor nearly $130,000. And because advisors usually take their fee out of your assets rather than sending you a bill (although they will send you a notification), you may not notice how much you’re paying over time.

On the other hand, say you pay another advisor a flat fee of $2,000 annually. At first, that’s a lot—almost double what you’d pay your first. But this advisor’s rate doesn’t increase as your assets grow (although it may rise with inflation). So after 30 years, you’ll have paid her just $60,000. That’s less than half what you would have spent had you chosen the advisor who charges a percentage of AUM. One downside to the flat-fee structure is that you’ll pay your advisor the same amount  no matter how well or how poorly your investments perform.

A commission-based advisor won’t charge you a fee—but as mentioned above, you could be paying a lot for buying into the advisor’s favorite actively managed investments. And you may not even notice the fees unless you examine your account statements.

If you’re just getting started investing, a robo-advisor could provide good value with a “set-it-and-forget-it” service.

But once you’ve accumulated a lot of savings, you might benefit from a human advisor who will sit down with you at least once a year (and be available on the phone) to walk you through the options. They can be especially useful in volatile markets. Look for someone who will set up a plan and manage your money for a flat fee, possibly with an hourly rate for specialized work. 

How can I find out what an advisor will cost?

Don’t be afraid to ask your advisor or potential advisor about their fees directly. You can also do your own research, since financial advisors with more than $25 million under management are required by the Securities and Exchange Commission (SEC) to file Form ADV. This document contains all sorts of information about a potential advisor—not just their fees but the total assets they manage, the services they provide, even any disciplinary actions they’ve faced. You can look up an advisor’s Form ADV on the SEC website.

How can I minimize advisor costs?

The popularity of robo-advisors has put pressure on human advisors. And the truth is, most advisors these days also use sophisticated programs to manage assets, reducing the time they need to spend on each client. So you may find advisors are more open to reducing their fees. There’s no harm in asking. 

Meanwhile, large mutual fund groups are getting into the advice game with their own advisory departments. These companies typically use a combination of technology and in-house expertise to offer low-fee advice, as long as you meet their minimum investment requirements.

Questions about fees

Consider asking a  prospective advisor these questions before you work with them, to determine how much you’re likely to pay, and to find out if they will work in your best interest: 

  • Do you take commissions only? Or do you also charge a fee?
  • Do you charge a percentage of AUM, and if so, how much?
  • Do you charge a flat annual fee, and is it negotiable?
  • Will you charge me less if I invest in passive index funds?
  • Will you help me with a budget/estate planning etc., and will that cost extra?
  • Do you receive commissions from brokerages for stock or fund trades?