Financial planners remain one of the best tools that people have available in terms of creating comprehensive plans for achieving financial goals. These experts get to know each client and their personal circumstances and aspirations to create both short-term and long-term guides for getting to where they need to be. In addition, financial planners will figure out how tolerant each client is of risk and assess changes over time to ensure those they work with don’t take on more risk than intended.
Many people think of financial planners as people who help choose stocks, but they also assist with budget, including how to reach goals like buying a house or paying off student loans. Unfortunately, many people also think that a financial planner is beyond their means, which is not true. However, it can be confusing to figure out exactly how much a planner costs since they have variable fee structures.
Here’s what you need to know:
The Many Fee Structures that Financial Planners May Use
Hiring a financial planner can be confusing because they can use any of several different fee structures, each of which comes with its own vocabulary. For example, some financial planners may charge only by fee, which can be set by the hour, month, or project. If you pay by project, the price is flat regardless of how long it takes. Many financial planners choose to charge an annual fee and then make themselves fully available to clients.
Another common fee structure involves commissions. This means that the planner earns a certain amount based on the investing products, such as annuities or stocks, they purchase on your behalf. With this type of structure, planners often charge a fee whenever they trade a stock for you, for example. A third structure combines these first two options. Called the fee-based structure, it involves fees that cover the majority of the planner’s earnings, as well as small commissions.
The fourth structure you need to know is called assets under management (AUM). With this structure, the planner charges a percentage of the assets they manage for you. This percentage charge is an annual fee. Frequently, managers have a tiered AUM structure, which means that they charge a lower percentage when you have more money invested with them.
This structure is usually best for someone who wants a long-term relationship with a particular planner. If you just want some advice or help with a budget, then an hourly fee may be better. Commissions can complicate the situation. They could motivate planners to put their own interests above yours, so you need to have a lot of trust in that person.
Another Variable in the How Much You Pay for a Planner
The amount you end up paying for financial planner services depends not just on the planner’s fee structure, but also on the type of advising that you want. The most traditional type of planner will work personally with you to help you manage investments, choose insurance policies, and make a comprehensive plan for your financial goals. You may communicate with this person through phone, video calls, or face-to-face meetings.
On average, this level of service costs 0.59 to 1.18 percent if the planner charges based on AUM. With more money invested, the percentage charged decreases. In terms of annual fees, this ranges from $590 for $50,000 or less invested to $177,000 for more than $30 million invested. This amount may seem small, but it is actually much more expensive than some other choices. So if you think that this amount is still too much, you have other options to consider.
Another approach to planning is a robo-advisor. This type of service will help you create an investment portfolio using a computer algorithm that takes into account your individual preferences. However, it will not provide you with the other services that an in-person planner would.
At the same time, this service is less expensive. This means that it is potentially ideal for someone with a low budget who does not need to be involved actively with investing decisions (the vast majority of people). On average, this service costs 0.40 percent annually by AUM or $49.08 by annual fee.
A third option is somewhere between the first two. This option involves online financial planning. This is similar to robo-advising but has more services, such as chats with live professionals through video or text. This personalized advice means that you pay a bit more, but still not as much as with traditional financial planning. The average cost by AUM is 0.53 percent annually. By flat fee, the average cost is $151.66.
This kind of service often serves well as a bridge between robo-advisor and traditional planning services. As people get more money, they may have questions they need answered by a professional. Eventually, however, you are more likely to transition to traditional services. Keep in mind that access to professionals does not mean you get comprehensive services from them.
The Decision to Hire a Financial Planner to Help with Finances
Not everyone needs a financial planner. As you earn more money and gather more assets, your situation will get more complicated. At that point, a financial planner may become more beneficial. When you make less money, hiring a financial planner on a fee-only basis for a couple of hours may make the most sense.
Then, down the line, you may want to develop a long-term relationship with a planner. The important thing is to check in on your situation regularly and make sure you are connected to the best services for your needs. Your needs will necessarily change over time, as should your engagement with financial planning services.