The 5 Real Costs When Hiring A Financial Advisor

If you’re considering whether now is the right time to hire a financial advisor, the bottom line might not always be what you might expect at the beginning. There is an assortment of costs and fees you might not know about, but definitely should be aware of before making your decision. Read on to learn more about the 5 real costs when hiring a financial advisor.

Asset Under Management and Fee-Based Payment Arrangements

If you have a portfolio with a large volume of assets, it could be more costly under certain arrangements. A common fee structure for financial advisors is called Assets Under Management (AUM). Under an AUM fee structure, the financial advisor gets a percentage of the amount of money they are managing for you, traditionally 1 per cent. Investors that are compensated through an asset management strategy solely earn their income through these measures. This can certainly add up, but it can create a strong working partnership between you and your advisor. Fee-based financial advisors have good incentive to make safe, strategic decisions with your money, so you know you’ll be working as a team.

Commission-Based Payment

Investors who are more inclined to push the envelope often go with a commission-based advisor. Under these types of arrangements, the upfront fee is minimal and financial advisors are only paid a commission based on the total earnings. This often seems like an attractive scenario, but it can be risky. Commission-based advisors are often more inclined to take chances with your investment portfolio that flat fee-based advisors wouldn’t. In addition, they might be more inclined to push certain types of financial products that might not be the best alternative for your needs. In the long run, it might be better to use a safer option than going with a commission-based financial advisor.

Advisor Compensation: Always Ask “Who’s Paying?”

Another potential pitfall with a financial advisor who isn’t fee-based involves the other parties they might be getting their commissions from. Some financial advisors, often stationed at a local community bank, might be getting their compensation from larger investment banks or brokerage firms. It might be “free advice,” but your best interests might not be their ultimate objective.  Many financial advisors operate on an incentive compensation plan that may put your priorities at risk. Always be sure to ask who exactly they work for and how they get their commission.

Watch Out for Additional Fees

Be sure to read the fine print in any agreement you have with a financial advisor. You could be on the hook for additional fees. In addition to paying your financial advisor, you might also have to pay third-party fees. This is often the case if your financial advisor uses mutual funds or exchange-traded funds as part of your investment portfolio. These costs can add up, and with mutual funds, they can range in the hundreds of thousands of dollars. Always make sure you know about any additional fees that you might be obligated to pay under the terms of your agreement.


Using a robo-advisor has become a much more popular cheaper option in recent years. robo-advisors, which also use an AUM arrangement, charge much less than in-person services. Usually, their flat fee is between 0.25 and 0.5 per cent. Recent surveys actually indicate a preference toward robo-advisors among most investors. However, the algorithms used by robo-advisors are largely untested given that they’ve only been in existence during the stronger markets that emerged in the aftermath of the 2008 collapse. The up-front cost is certainly a plus, but with the increased uncertainty of the current economy, it might not be the safest option to use a robo-advisor during a volatile market.

Regardless of what avenue you choose when selecting a financial advisor, you should always take great care to be on the lookout for unexpected costs. Before hiring an advisor you should ask several financial planner questions regarding their compensation. Whether it’s a flat-fee or a commission-based payment arrangement, you should always make sure your financial advisor’s best interests align with your own. Be sure to read the fine print and be on the lookout for extra fees. And if you decide to go with a robo-advisor, make sure your being cautious in this year’s uncertain market. Otherwise, you might be caught off guard by the 5 real costs when hiring a financial advisor.

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