You wouldn’t buy a new pair of shoes or purchase a new car without knowing what it will cost, yet the majority of people don’t understand the fees they are paying their financial advisor or how much a financial advisor should cost. It’s not entirely their fault, however – many of the big players in the financial industry make it inherently difficult to decipher exactly what you are paying them, with many of their fees being hidden and non-transparent to the client.

Financial advisors get paid for the advice and services they provide, but HOW they get paid often determines how much that specific advisor costs the client. How advisors get paid also plays a role in how aligned their interests are with yours, which we will touch on shortly. Generally, there are two major ways financial advisors get paid: commission-based advisors and fee-only advisors.

Commission-Based Financial Advisors:
When you begin to wonder how “much does a financial advisor cost”, 9 out of 10 firms you come across will be commission-based advisors in some form. These advisors are paid through the investment products you buy from them – they receive a percentage of your investment dollars upfront (also known as a commission) when they sell you their investment product. These advisors can also be referred to as “Fee-based” advisors. Fee-based advisors are paid a combination of commission on the products they are selling you as well as additional fees from your account.

An important distinction needs to be understood about commission-based and fee-based advisors – they are NOT a fiduciary.

So, what is a fiduciary anyways and why is it so important for you? At its most basic level, a fiduciary is a person or firm who is always required to act in the best interest of the client. Unfortunately, not everyone providing financial advice is held to the fiduciary standard, and this includes all commission-based and fee-based advisors.

Because of this, commission-based and fee-based advisors often have incentives to recommend products that aren’t necessarily in their client’s best interest but may earn them a larger commission check.

Commission-based advisors will quote you an advisor fee that is typically around 0.75%-1.5%, but investors beware: there are layers of hidden transaction fees, management fees, and sales charge fees that are likely not being communicated to you by your advisor. These hidden fees are sneaky and allow the advisor to receive compensation from investment product companies for selling their products. Clients do not see them coming out of their account balance, but they are layered within the products that are being sold to you.

Make no mistake, you are paying your advisor’s fee as well as these layers of hidden fees – and they add up fast, totaling 3.0%-4.5% for most investors. Most investors are unaware of these hidden layers and non-transparent fees and only think they are paying the advisor fee of 0.75%-1.5% - unfortunately, this is only half the story.

Fee-Only Financial Advisors:
Read carefully, do not confuse a fee-only advisor with a fee-based advisor – they are distinctly different. A large differentiator for fee-only advisors is that they operate in a fiduciary capacity, putting their client’s interests first and foremost at all times; not selling them products that earn the advisor the biggest paycheck. The most common fee-only advisor structure is to charge a percentage based on the client’s account size – this is a good thing for investors. This fee structure allows for complete alignment of the client’s and the advisor’s interests.

So how does this work? Think about it this way – the only way the advisor can get a pay raise is if they make you more money and grow the size of your account. This gives investors peace of mind knowing that every investment decision made by their advisor is for one reason and one reason only – to make their clients more money.

But you must dig even further – even advisors who claim to be fee-only can still have layers and layers of hidden fees if they are not actually investing your assets themselves. More often than not, fee-only advisors will still use a third party to manage their clients’ money, which comes with inherent fees. These fees are for the third party “middleman” and again, are not transparent to the client.

And here’s the kicker – they are eating into your return. Seek out a fee-only advisory firm with a team that has the competence and expertise to personally invest your assets themselves. This removes the middleman, providing straightforward and transparent fees, delivering you better investment performance and enhanced peace of mind.

Using a fee-only advisory firm that actually manages your assets themselves and not with investment products (i.e. mutual funds) creates a trusting relationship between the client and advisor because the client knows that every decision that is made is in their best interest. It also allows for a completely transparent relationship and eliminates hidden fees that sneak up on investors and eat away at their return.

Remember that 9 out of 10 advisors and firms will quote you their fee of 0.75%-1.5% -- but what they’re not telling you or showing you are the hidden management, transaction, and sales fees that are being taken out of your account unbeknownst to you. This leads to a total drive out fee ranging between 3.0%-4.5% for most investors – a lot more than what you thought you were paying.

Although fee-only firms who manage your assets themselves might have a slightly higher advisory fee, they eliminate the hidden fees that you don’t see coming out of your account by removing the middleman. This leads to straightforward fees totaling 1%-2%, providing a more cost-effective and often higher performing option to the commission-based or fee-based advisor who uses investment products.

How Much Does a Financial Advisor Cost – Key Areas to Look For:
So how much does a financial advisor cost? Understanding the difference between a commission/fee-based advisor and a fee-only advisory firm is a great place to start. Some advisors are a hybrid of the two fee structures, collecting commissions and fees based on their clients account size – but these advisors are also not held to the fiduciary standard of acting in your best interest.

When searching for an advisor, looking for a true fiduciary is the ideal place to begin. The next step would be finding an advisor who has a team with the competence and expertise to manage clients’ assets themselves. These advisors are obligated to act in your best interest, removing the middleman and allowing you to rest easy knowing every decision your advisor makes is to maximize benefit to you. This creates a transparent and trusting relationship that is imperative for successfully achieving your financial goals.

Contact McGervey Wealth Management Today:
By working with a fiduciary like McGervey Wealth Management, you can be assured you’re getting investment advice from a firm that has the obligation to disclose conflicts of interest and put your interests ahead of its own. To learn more about McGervey Wealth, contact us today or get your Wealth Score to see how you stack up for retirement.