Are financial advisors worth It? (2024)

Key points

• Financial advisors can charge fees or earn commissions and sometimes do both.
• Vanguard research found that advisors can add up to 3% in net returns.
• A good advisor should act like your personal CFO.

You wouldn’t expect to perform your own annual physical or biannual teeth cleaning. Yet many investors question if it’s worth paying a financial advisor to provide corresponding services for your investments.

Financial advisors provide many services, not the least of which is their expertise.

“They work hard to understand complex estates, ever-changing tax laws and a variety of client issues,” says Chris Girand, a lecturer at the University of California San Diego’s Rady School of Management and former president of the American Association of Independent Investors. “That being said, most advisors don’t allocate capital in such a way that adds value, and they tend to build passive portfolios that track common indexes.”

This begs the question: Are financial advisors worth it, and how can you tell if your advisor is earning her fee? So let’s consider it.

Do I need a financial advisor?

Ask a financial advisor if they’re worth paying for, and the answer will most likely be “yes.” But it’s still worth probing to find out why financial advisors feel they’re worth paying for.

Determining if you need a financial advisor depends on many factors, such as your level of expertise, how much time you have to dedicate to managing your investments and the complexity of your finances.

Naturally, if you don’t have the expertise or time to manage your own investments, a financial advisor could be a worthwhile investment in and of herself.

“Think of a good advisor as a personal CFO,” says Chris Berkel, investment advisor and president of Axis Financial in Edmond, Oklahoma. “You wouldn’t run a large corporation without one, so you probably shouldn’t run your nest egg without one.”

However, if you know about investing and can spare a few minutes each week or month to manage your portfolio, you may not need to pay someone to do it for you. That is until life gets too complicated for even you to manage.

At what point should you get a financial advisor?

As your financial situation becomes more complex — think about topics such as trust and estate planning, real estate structures, liability and risk management, business ownership, and succession planning — working with someone who can spot issues and act as your quarterback can be a considerable value.

But for those individuals with a fairly simple situation and smaller investment portfolios, using multiasset risk targeted and low-cost ETFs or mutual funds may be the best approach, especially if you can maintain the discipline to not trade on emotion.

Emotional discipline is a significant factor in determining if you need a financial advisor. Over the past decade, Vanguard has been trying to quantify the value of a financial advisor, and its research shows that the greatest value comes during the very worst of times and the very best of times in the market.

“I can personally attest that a good part of my job is counseling clients not to buy high out of greed when the market is hot and selling low out of fear in a volatile environment,” says Marti Awad, senior vice president and financial advisor at Wealth Enhancement Group in Denver.

According to a Vanguard July 2022 report, the investment firm estimates that advisors can save investors “tens of percentage points of value-add.”

“If all a financial advisor does is keep you from making a really stupid mistake, then they can earn a lifetime of fees,” says James Angel, associate professor of finance at Georgetown University’s McDonough School of Business.

How much do financial advisors cost?

Understanding how much advisors cost and how they are paid is essential because this can influence their advice.

“If they are paid on commission, they have the incentive to sell you whatever pays them the most,” Angel says. “If they are paid by the hour, let’s (talk) about how your dog feels on your birthday. If they are paid on assets under management, then they have the incentive to tell you to mortgage your house to give them money to invest.”

This isn’t to say every financial advisor will take advantage of you in whatever way earns him a higher fee.

Most advisors are well-intentioned and know that an unhappy client can easily translate into no client. But it still behooves you to understand what sort of fee agreement you’re getting into before you sign on with an advisor.

The following table shows how financial advisors charge and the average cost under each fee structure.

Financial advisor fees

Financial advisor fees vary in how and where they are charged.

Berkel says, “Some are right in the client’s face, like advisory fees. Some are more hidden and less upfront, like underlying fund management fees.”

It’s important to note that you may also incur fund management fees on the investments you use in addition to the advisor’s fee. For example, your advisor may charge a fee of 1% of your account balance each year, but you may also pay 0.25% on each mutual fund he invests you in. This latter fee doesn’t go to your financial advisor but the investment company managing the funds to cover its operating costs.

What to know about fee-based advisors

Advisors can also earn a combination of commissions and fees. These advisors are known as “fee-based advisors,” distinct from “fee-only advisors” who don’t earn any commissions.

Whether advisors should earn commissions has become a hotly debated topic in finance. Opponents protest that commissions misalign advisor incentives: The advisor is incentivized to recommend whatever investment pays the advisor the most, rather than the option that’s best for the client, and may be incentivized to place lots of trades, known as churning.

Fee-only advisors, on the other hand, are not compensated based on trades or products. “The fee is the same with zero trades or 100 trades,” Berkel says. It’s also the same regardless of what product you buy — or if you buy any.

This should align the advisor’s incentives with the investor’s. Because their fee is based on the total amount of assets, it is a mutually beneficial relationship, as the more the portfolio value increases, the more money they make in fees.

The legal term for an advisor who must put her client’s interests before her own is fiduciary. Fiduciaries generally cannot earn commissions; however, not all fee-only advisors are fiduciaries.

As a potential client, it’s up to you to ask an advisor directly if she is a fiduciary.

That said, proponents of the commission argue that investors who don’t want ongoing advice and just someone to help them access investment products may find a commission-based advisor as the cheapest option.

What percentage fee is too high for a financial advisor?

Asking how much is too much to pay for a financial advisor is like asking how much is too much for a cup of coffee. Coffee from rare beans and handcrafted with utmost care may be worth more than a cup of Folgers. Therefore, what percentage fee is too high for a financial advisor?

The Securities and Exchange Commission considers an advisory fee of more than 2% of the total assets under management as potentially excessive. Meanwhile, Vanguard’s research found that an advisor can add up to 3% in net returns.

Awad believes anything above 1.25% “creates too much drag on the portfolio, and you are better off going it alone.” But she adds that even a much lower fee is too high if you do not receive commensurate service and advice.

Tip: To determine if a fee is too high, you must assess the value, expertise and personalized attention received. Also, don’t forget that fees can be negotiable. If you think an advisor charges too much, ask for a break.

Robo-advisors vs. financial advisors

If you want the lowest cost financial advice, you may prefer robo-advisors. These algorithm-based platforms “will give you a cookie-cutter portfolio, which is not too bad, and for a little extra, let you talk to a human,” Angel says.

Robo-advisors can charge based on assets under management or a monthly fee. AUM fees are usually around 0.25%, while monthly fees range from zero to $5 (if the advisory charges are on a monthly basis). Remember, you’ll also pay fund fees, which average 0.17% among most robo-advisors.

You do get what you pay for with robo-advisors. But they cost less than a human financial advisor because you often get limited or no personalized attention or human interaction.

So, robo-advisors can be a good option for investors who don’t have a lot of complexity in their financial life that would require more outside-the-cookie-cutter thinking but who also don’t want to spend time managing their accounts.

Should you manage your own money?

Are financial advisors worth the money? As with many things in life, the answer is: It depends.

Some investors simply cannot relinquish control of their hard-earned savings. “These control freaks find that managing their money is a hard, never-ending problem — but it is a wonderful problem to have,” Girand says.

Control freaks aside, “most individuals would benefit from investment guidance, but the benefits must outweigh the costs,” Awad says.

Experts say that individuals with significant assets who would benefit from tax optimization should consider professional management.

That said, the average investor may not need such guidance and could instead manage just fine with a portfolio of low-cost exchange-traded funds or mutual funds — assuming she is willing to put in the time to monitor and rebalance her account over the years.

If you are not educated or interested in the responsibilities involved in managing your own portfolio, then it is a good idea to find a financial advisor.

Frequently asked questions (FAQs)