Who Pays For Investment Advice?

Investment advice is any recommendation or guidance that educates, informs, or guides an investor about a particular investment product or series of products. Investment advice can be professional or amateur. Financial planners, bankers, and brokers can provide investors with investment advice specific to their financial situation and short- and long-term financial goals. According to a Ramsey Solutions research study, 44% of people who work with a financial advisor have $100,000 or more saved for retirement, while only 9% of those who do not work with an advisor have saved this amount. Financial advisors are usually paid through commissions, hourly fees, flat fees, retainer fees, or a combination of fees and commissions.

Flat fees vs. percentage fees

When it comes to investment advice, there are two main types of fees that you may encounter: flat fees and percentage fees. So, what's the difference between the two, and which one is the best option for you? Let's take a closer look.

Flat fees are typically charged as a set amount, such as a certain dollar amount per year, and remain the same regardless of the size of your investment portfolio. This type of fee structure is often used by financial advisors who manage large investment portfolios, usually exceeding $1 million. For example, a flat fee of $7,500 per year for a portfolio worth $2.5 million results in an effective annual percentage rate of 0.3%, which is lower than the industry standard of around 1%. This can result in significant savings for clients with large investment portfolios.

On the other hand, percentage fees, or asset-based fees, are calculated as a percentage of the total assets under management. A standard percentage fee charged by financial advisors is 1% of the total assets. This type of fee structure is more common for smaller investment portfolios, as it ensures that the advisor's fee is proportional to the size of the portfolio. For example, a 1% fee on a $200,000 portfolio would amount to $2,000 annually, while the same fee on a $2 million portfolio would amount to $20,000.

Now, let's weigh the advantages and disadvantages of each. Flat fees can be more cost-effective for clients with large investment portfolios, as they pay a set fee regardless of the size of their portfolio. This can result in substantial savings compared to percentage fees. However, for clients with smaller portfolios, flat fees may consume a large percentage of their account, making it less affordable.

Percentage fees, on the other hand, are more advantageous for smaller portfolios as they scale with the size of the portfolio. This ensures that the advisor's fee is proportional to the amount of work required to manage the investments. However, for larger portfolios, percentage fees can become very costly, and the fee may not always reflect the complexity of financial planning required.

Ultimately, the decision between flat fees and percentage fees depends on the size of your investment portfolio and your specific financial needs. Flat fees are generally more suitable for larger portfolios, providing cost savings and ensuring that the advisor's fee remains proportional to their time spent managing the investments. Percentage fees are more common for smaller portfolios, providing a scalable fee structure that aligns with the size of the portfolio.

Free resources for investment advice

While it's challenging to come by good investment advice, there are several free resources available. Here are some options to explore:

Your Bank or Credit Union

Your financial institution likely offers various free tools and resources to help you manage your money effectively. These can include budgeting apps, automated bill payment services, and online educational hubs. When choosing a bank or credit union, consider prioritising those that offer comprehensive financial advice.

Your Employer or 401(k) Provider

If you have a workplace retirement plan, take advantage of the additional perks it may offer, such as free financial advice. Many employers are now prioritising financial well-being programs and offering budgeting, debt management, and financial planning tools to their employees.

Online Broker

Similar to banks, many online brokers provide educational resources to help you learn about investing. Some even offer investing curriculum on their websites, including videos, quizzes, and learning labs.

Pro-bono Financial Planning Services

Several organisations provide pro-bono financial planning services for people facing financial challenges or vulnerabilities. For example, the Foundation for Financial Planning assists wounded veterans, domestic violence survivors, and cancer patients. Other organisations like Advisers Give Back, the U.S. Department of Housing and Urban Development, the Financial Planning Association, and the Financial Counseling Association of America also offer free or discounted financial advice.

Financial Advisor Consultations

Some in-person investment advisors offer free initial consultations, giving you an opportunity to understand their approach and whether they can help you achieve your financial goals. Come prepared with questions to make the most of these sessions. Remember, you are not obligated to continue working with them after the consultation.

Free Online Resources

There is a wealth of free financial advice available online, including articles, podcasts, and YouTube videos. When evaluating these sources, consider the qualifications of the content creator, their motivation for creating the content, and whether they are citing legitimate research or solely personal experiences.

Additionally, you can access free online personal finance courses, such as MoneySmart by the Federal Deposit Insurance Corporation (FDIC) and Learning Lab by GreenPath. These courses cover essential financial topics and provide interactive learning experiences.

Worksheets and Workbooks

Worksheets and workbooks can be valuable tools for visualising your financial situation and goals. The Consumer Financial Protection Bureau (CFPB) offers a financial empowerment toolkit in English, Spanish, and Chinese, while the Foundation for Financial Planning provides a free workbook called "Navigating Your Financial Roadmap."

Credit Counselling Services

If you're facing money issues, such as debt or student loan burdens, credit counselling services can provide valuable assistance. They can help you create a debt management plan, review your credit report for errors, and even guide you in purchasing a home or avoiding foreclosure. Look for certified and reputable organisations, such as those affiliated with the National Foundation for Credit Counselling or the Financial Counselling Association of America (FCAA).

Robo-advisors

Some popular robo-advisors include:

• Wealthfront: Offers sophisticated financial planning, customised portfolios, and up to $1 million in FDIC insurance.
• Betterment: Provides robust cash management features, customizable asset allocation, and multiple goal-testing options.
• Vanguard Digital Advisor: Uses Vanguard's key ETFs to create a personalised retirement plan and portfolio.
• SoFi Automated Investing: Offers free portfolio management and access to certified financial planners.
• Acorns: Known for its automatic round-ups that make saving and investing easy, but fees can be high for small account balances.
• Ellevest: Offers a single flat-fee plan that includes discounted access to professional financial planning and educational resources.

Online financial planning services

Benefits of Online Financial Planning Services

One of the main benefits of online financial planning services is the convenience and accessibility they offer. You can access these services from your phone or computer at any time, without having to schedule an in-person meeting. This can be especially useful for people with busy schedules who may not have time to meet with a traditional financial advisor.

Types of Online Financial Planning Services

There are two main types of online financial planning services:

• Robo-Advisors: These automated platforms use algorithms to generate investment advice and manage your investments. They are usually low-cost and don't require a high minimum balance to open an account. Robo-advisors are a good option for beginners who want a hands-off approach to investing and don't need specific advice on complex financial matters.
• Human Advisors (Virtual): These services offer personalized financial planning and investment advice from a human advisor, delivered through virtual meetings, email, or other digital channels. Human advisors are more expensive than robo-advisors, but they can provide more tailored advice and a more comprehensive financial planning service.

Examples of Online Financial Planning Services

Some popular online financial planning services include:

• SoFi Automated Investing: SoFi offers complimentary access to Certified Financial Planners (CFPs) and has no account minimum or management fees. However, it lacks tax-loss harvesting features and has limited portfolio diversity.
• Betterment: Betterment offers access to CFPs and has a low minimum balance requirement of $100. It provides personalized, ETF-based portfolios and charges a low fee of 0.25% per year.
• Wealthfront: Wealthfront is one of the best robo-advisor options for socially responsible investing and offers features like tax-loss harvesting and crypto trusts. It has a low annual fee of 0.25% for investment accounts.
• Ellevest: Ellevest is a comprehensive financial planning and trading platform designed specifically for women. It offers automated investing, retirement accounts, and an extensive library of content and workshops.

Choosing the Right Online Financial Planning Service

When choosing an online financial planning service, consider your goals, risk tolerance, investments, and time horizon. If you are a new investor or prefer a passive investing approach, a robo-advisor may be a good option. On the other hand, if you need personalized advice and a customized financial plan, a human advisor may be a better fit.

It's also important to do your research and understand how the investment recommendations are generated by the platform. Most robo-advisors use algorithms based on modern portfolio theory to optimize risk and expected return.

Traditional local financial advisors

The process of finding a traditional local financial advisor often involves a lot of legwork. It is important to select several firms to call and vet, perhaps setting up an initial consultation to ensure the firm and its advisors meet your financial planning needs and have expertise in the areas where you need help. It is also crucial to double-check the firm's and advisor's credentials and confirm you understand their pay structure.

Some traditional local financial advisors charge a flat fee, while others charge a percentage of your total assets under management, typically around 1%. This fee structure means that those with over $1 million in assets may be able to save money by opting for a flat fee.

When choosing a traditional local financial advisor, it is important to verify their certifications. "Financial advisor" is a general term that anyone can use, so it is best to work with a Certified Financial Planner (CFP) for financial planning and a Certified Public Accountant (CPA) for tax preparation.

• Zoe Financial
• Vanguard Personal Advisor
• Betterment Premium
• Facet
• Harness Wealth
• Empower
• Wealthramp
• Ellevest Private Wealth Management
• Schwab Intelligent Portfolios Premium
• Merrill Guided Investing

Frequently asked questions