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Are You Overpaying for Your Financial Advisor?

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A good financial advisor can improve your investing strategy, boost your budget and help you reach financial goals.

Overpaying for an advisor, however, can cause fees to chip away at those benefits.

Of course, financial advisors don’t typically work for free. And as much as everyone may want an expert coach in their corner, they have to weigh whether it’s worth the cost when money is tight.

Here’s what to know about how much to pay a financial advisor and how to determine whether you are overpaying for your financial advisor.

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What’s a Financial Advisor Worth to You?

To decide whether an advisor is worth the cost, you have to first determine the value the advisor provides.

“Similar to the other trusted and valued professionals in one’s life, such as a long-standing doctor, tax accountant, attorney or golf coach, a financial advisor’s value brings benefits both in the short term as well as the long term,” says Andrew Crowell, vice chairman of wealth management at D.A. Davidson, and contributor to the U.S. News Smarter Investor blog.

In the short term, an advisor can help you organize, clarify and focus your financial life with a comprehensive financial plan, he says. This involves more than just choosing the right investments for your goals and situation.

A great financial advisor will also “help you build a sustainable budget, plan for your future goals, assess any outstanding debts you have and keep you updated with relevant financial news,” says Corbin Blackwell, a certified financial planner at Betterment.

Navigating the markets is one of an advisor’s main responsibilities, says Aditi Javeri Gokhale, chief commercial officer and president of investment products and services at Northwestern Mutual. “Without an advisor, even savvy investors can make mistakes.” Those errors include reacting out of fear or responding to headlines in a short-term way that hinders their long-term success.

An advisor can help link where you are today with where you want to be in the future through a financial plan. The written financial plan becomes a road map to ensure you stay on track financially and continue to progress toward the desired financial destination, Crowell says.

A financial plan also needs to be refreshed on a periodic basis to ensure it still points toward your desired goals, he says. “Having a trusted financial advisor who travels alongside you for this journey and has the past, present and future institutional knowledge to help guide you through life’s changes can be invaluable to ensuring your financial success.”

[READ: MBA or CFA: Which Is Better for Financial Advisors?]

Typical Financial Advisor Fees

How much a financial advisor costs depends on expertise and the services provided. Many financial advisors charge a percentage of the assets under their management, called AUM. Typically this is around 1%, but it can be charged on a sliding scale with higher asset levels receiving a lower fee.

Advisors may use different fee structures as well, such as an hourly fee or flat fee for creating a financial plan. Some earn commissions from the investments they sell. This makes it hard to pin down an absolute number that is “too much” to pay for an advisor.

Are You Overpaying for Your Financial Advisor?

To avoid paying too much for an advisor, you first need to understand how the advisor is compensated and how that compensation is linked to the services provided. You should ask any advisors you consider working with how they are compensated, and the advisors should be able to provide a clear and direct answer. “If they tell you it’s free, they are lying,” says Mary B. Kusske, certified financial planner at Kusske Financial. “No one works for free.”

Blackwell recommends avoiding advisors who exclusively sell their own funds or make more money the more you trade, as this can easily lead to overpaying for their services.

Once you understand how an advisor is compensated, you can determine if what you are paying is fair. “Fee becomes an issue in the absence of value,” says Sean Howe, senior vice president of wealth management and portfolio manager with UBS Financial Services. As long as the value you receive is commensurate with the fee the advisor charges, you’re probably not overpaying.

That said, if you’re wondering if you are overpaying, you probably are, Kusske says. “You should feel comfortable enough to let your advisor know you have concerns,” she adds. “If they are charging more than you are earning, that may be a red flag.”

Other red flags that you may be paying too much for your advisor include being charged larger-than-average commissions or annual fees that consistently rise without an increase in services from your advisor, says Michaela McDonald, a certified financial planner and financial advice expert at Albert.

“You can determine if you’re overpaying for your advisor by reviewing the services they provide you each year and comparing them to what is now offered by other companies for the same price or even less,” she adds.

You can get the opinions of a few other advisors to help gauge if what you’re paying is fair, Howe says.

If you pay a large fee just to have the advisor rebalance your portfolio once a year, for instance, you’re probably overpaying, Blackwell says. If you pay that same fee for a suite of services, such as rebalancing, portfolio management, comprehensive financial planning, tax mitigation, estate services and helping with day-to-day cash management, the fee is probably justified.

“A good value goes beyond just finding the absolute lowest price since different advisors provide different services,” she says.

Ultimately, it may not be an issue of cost so much as one of fit. You may just need an advisor with whom you mesh in terms of personality, communication or investment style, says Kate Holmes, founder of Innovating Advice.

[Read: CFA vs. CFP: What They Are and How They Differ]

Should You Keep Your Financial Advisor When Money Is Tight?

If you’re worried about making rent, it seems superfluous to pay someone to help you manage your money. But this could also be the time when you need financial guidance the most.

Just as it would be unwise to cancel your health insurance when money is tight because it would expose you to even more costly risk, it can be inadvisable to forgo financial guidance for the same reason, Crowell says.

“Long-term financial success is not only the result of what you do when things are good, but also about how you react when things aren’t easy,” Gokhale says. “And these challenging times are when the value of a good advisor becomes most clear.”

When you run into financial difficulties, such as job loss or unexpected expenses, a financial advisor can help the most, McDonald says. “Not only can we help you plan for these emergencies prior to them occurring, but we can also help map out solutions to get you through these difficult times when they occur.”

It’s also worth remembering that most advisors take their fees out of your accounts directly, rather than requiring you to make a payment from your checking account, Blackwell says. So as long as you don’t need to use your investment accounts to cover emergency expenses, your advisor’s fee shouldn’t impact your ability to cover daily living costs.

“Working with an advisor and financial planning is not an event, it’s a journey,” Howe says. “It should be a consultative relationship with clear and consistent communication, focused on you and your family.”

About the author

Erin Clark

Erin is a sports enthusiast who loves indulging in occasional football matches. She is a passionate journalist who flaunts a perfect hold over the English language. She currently caters her skills for the sports and health section of Report Door.