I’ve found that a financial adviser can cost $5,000 a year. Is it worth it?

The other day a reader wrote into us making a good point: She wanted us to give people a more in-depth look at what a financial adviser might really cost them. Here’s her email, and below, we get into whether an adviser is really worth the cost, and for whom. (Looking for a new financial adviser? You can get matched with a financial adviser who might meet your needs here.) 

Reader email: I’m nearly 69 and have had investments with big financial firms and a private adviser for over 30 years. I would like for you to address the cost of a financial adviser. For example, if you have $500,000 with any of them, it may cost at least 1% of your holdings annually. That’s a minimum of $5000/year!  Now, hopefully your portfolio is exceeding that $5,000 by a lot, but what about the years when your portfolio goes down? The portfolio holder loses not only the amount of the investment’s loss, but also that fee for the advisor. All in all, the management fee can amount to many tens of thousands of dollars over the years, , and in my experience, it wasn’t worth the loss to my account. It would be a good idea for you to share this with readers and talk about: Is paying a financial advisor worth it in years when there is a loss to an account? What does an adviser really cost?

Have a question about working with your financial adviser or looking to hire a new one? Email [email protected].

Answer: We’re glad you called this out, as cost is an essential thing to consider if you’re looking to hire a financial adviser. While many traditional advisers charge around 1% of your assets under management, explains Alana Benson, investing spokesperson at Nerdwallet — others charge less. And for some the cost will be worth it, and for others, not so much. Let’s dive in.

First of all, 1% does add up. “While 1% may not seem like much, keep in mind that as your account balance grows, so will the dollar amount that goes to your fee,” Benson says. If you have $500,000 managed by a financial adviser who charges a 1% annual fee, you’d pay $5,000 per year, and if your balance grew to $750,000, your fee would then grow to $7,500 per year.

That said, plenty of firms charge less than a 1% fee for in-person services. “We charge 1% on the first $100,000 but the fee reduces after that. I have mainly seen the 1% and above fee with the larger firms that do a lot of marketing,” says certified financial planner Thomas Stapp of Stapp Financial Wealth Management and Planning. And Benson notes that: “If you’re comfortable working with an online financial adviser, you may be able to drop that fee to under 0.50% and receive comparable services.”

You can get matched with a financial adviser who might meet your needs here.

There are also other ways financial advisers are compensated besides a percentage of assets under management, and that kind of arrangement may be more financially beneficial to you, depending on your needs. “There are thousands of us who choose to charge for our advice by the hour, on a project basis or an ongoing monthly fee. It depends on what the client wants and needs,” says certified financial planner Skip Fleming of Lodestar Financial Planning.

A Magnify Money survey from 2021 revealed that 61% of respondents said they pay less than $3,000 annually for related financial services and this guide breaks down what you can expect to pay for a variety of different types of services. What’s more, many times these fees are negotiable, and we’ve highlighted the best ways to approach a financial adviser about lowering their stated fees.

Is an adviser worth the cost? 

The answer isn’t simple, and whether an adviser is worth the cost depends on factors like how complex your finances are and how savvy you are when it comes to financial planning and investing. “A good financial adviser can offer much more than investment management. An adviser should be able to help you with complex financial topics, such as retirement planning, estate planning, equity compensation and overall financial planning,” says Benson. If you don’t feel comfortable tackling that yourself, an adviser may be worth it to you. 

Adds certified financial planner Danielle Miura, founder of Spark Financials: “An experienced and well-trained adviser will take time to dive deeper into your life goals and aspirations” — and develop a plan for you from there. If that’s something you’d like help with, consider an adviser.

You can get matched with a financial adviser who might meet your needs here.

You may also benefit from an adviser if you find it hard to keep your emotions in check when managing your investments, pros say. “For many people who self-manage, they don’t have the discipline to keep emotions out of their financial life and therefore can make bad financial decisions such as selling low and buying high,” says certified financial planner Edward Schmitzer and president and founder of River Capital Advisors.

Should I manage my money on my own?

Financial advisory fees can add up to tens of thousands of dollars over the course of your investing life. And that matters. So if an individual has the skills and discipline to develop a diversified portfolio, conduct research related to their portfolio, keep their emotions in check, make changes to the portfolio based on facts and research, and determine the proper withdrawal rate from a portfolio, then Schmitzer says, “They don’t need an adviser.” Check out this guide on who does not need a financial adviser.

Have a question about working with your financial adviser or looking to hire a new one? Email [email protected].

• Readers emails and questions edited for clarity and brevity.