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12 Things to Consider Before Hiring a Financial Advisor

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Like finding a good doctor, settling on a financial advisor is an important decision for your financial well-being. You will spend a lifetime accumulating wealth, and you want your nest egg to grow and be protected — and a financial advisor can help you in your journey to financial security. (Here are 28 smart ways to make extra money.)

Many financial firms and banks offer the services of a financial advisor. There were over 263,030 personal financial advisors in the U.S. as of May 2021, according to the Bureau of Labor Statistics. But how do you know how to choose the right one? And how much will it cost you?

24/7 Wall St. created this list of everything one needs to know in order to best understand how much it would cost to hire a financial advisor, based on a report released by financial technology company SmartAsset, entitled How Much Does a Financial Advisor Cost?

The list details the different fees and compensation structures. Yet there is more to hiring a financial advisor than just knowing the fee. You will want someone who understands your investing philosophy to help you reach your financial goals. (Learn how to get the most out of 10 common investments.)

The best advice is to interview several advisors before partnering with one. You are going to be working with that person for many years. Find the advisor you feel most comfortable with. Your financial health depends on it.

Click here to see 12 things to consider before hiring a financial advisor.

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1. Fee type: percentage of assets under management

Your financial advisor earns compensation in a number of ways, sometimes combining several methods at once. One of the most common compensation structures is a percentage based on assets under management. If your advisor managed, say, $1 million of your assets in 2021, you may have been charged a fee of $1.02% on that amount, according to a report by Advisory HQ News Corp. The more assets under management, the lower the percentage. The percentage fee is usually in the neighborhood of 0.59% to 1.18% annually of the total assets being managed.

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2. Fee type: hourly charges

If you go to an advisor for a one-time consultation to craft a financial plan or other project, you may be charged hourly for the service. Each financial advisor sets a different amount, but charges typically range from $120 to $300 an hour.

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3. Fee type: fixed fees

Some advisors charge a fixed fee for their services, which include everything from managing your assets to developing a financial plan. If your investment portfolio is under $499,000, your fixed fee may be $7,500. A much larger portfolio of $7.5 million in assets will cost up to $55,000 to manage.

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4. Fee type: commissions

Your advisor may sell certain financial products from which they receive a commission on the sale. They may also earn a commission on a financial transaction. Just be sure that when selling a commission-based product, your advisor is putting your interests above their own. It is their fiduciary duty to do so.

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5. Fee type: performance-based fees

Your advisor may set a benchmark for portfolio performance. If he or she reaches that goal, an additional fee may be charged.

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6. Common extra costs

Advisors may invest your account in a mutual fund or an exchange-traded fund. In that case, you are responsible for any costs associated with those funds. Brokerage, custodial, and other third-party fees may be assessed.

Financial advisors frequently offer services beyond financial management. They may also provide tax advice or insurance planning for free. On the other hand, you will be charged for those extra servicer if they are not part of your basic service. Ask about other sources of compensation you may be charged. Some advisors partner with tax, legal, or insurance experts, and that firm may bill you.

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7. Robo-advisors vs. traditional advisors

Robo-advisors are a good option if you are starting out and don’t have much money to invest. Your fee will be between 0.25% and 0.89% of AUM, much lower than a traditional advisor. The drawback is you won’t be dealing with a human, which can be frustrating. Robo-advisors may not offer the same scale of financing expertise, including estate planning and insurance topics, as a traditional investor. Those with more complex finances or larger sums to invest should probably opt for a traditional advisor.

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8. Finding financial advisor fee schedules

To find how much you will be charged, review the firm’s Form ADV, a Securities and Exchange Commission requirement. It will detail in Section 5 each compensation method. Another place to look is Part II of Form ADV, the firm’s brochure. There, you can get a better understanding of how the advisor calculator fees and additional sources of revenue.

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9. Making sure you’re being charged fairly

Looking at SEC documents provides a detailed picture of what you will be charged. But ask your potential advisor, too. He or she should explain their fees to you in clear, understandable language. If you are confused or the advisor blows off the question, take your business elsewhere.

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10. Minimizing fees

Fees based on the percentage of assets under management are higher the less you have to invest and lower the more valuable your portfolio is. If you do not have a large investment portfolio, a robo-advisor would be the more affordable avenue. In general, fee-only and fee-based structures are the most common. Looking for a simple optio with less conflict of interest? Go for a fee-only structure. And do not be afraid to haggle for a better fee.

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11. How to find a qualified financial advisor

Ask friends or relatives for recommendations for a financial advisor. You can also check out SmartAsset’s free tool to find advisors in your area. The ultimate decision will depend on your face-to-face meeting. Interview the advisor on their fee schedule and all sources of compensation. Learn the firm’s investment philosophy to understand if it matches up with yours.

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12. Try out several advisors before settling on one

Just like you would get a second opinion from a doctor on a medical issue, you should meet with several advisors before making a decision. Who do you feel most comfortable with? Who is giving you the best advice? Does it match your goals? Choose the one best suited for your financial situation.

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