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So you want a financial advisor, but haven’t a clue what they cost. What to do? And what do you get for what you shell out?

First, know that there are two basic types of advisors. Broker-dealers are sales people. They get paid commissions for what they sell you – funds, stocks, bonds, etc. The second kind, registered investment advisors. or RIAs, don’t get compensated for selling stuff. Investors pay RIAs a flat fee, or by the hour or as a share of assets.

RIAs tend to think they are on the side of the angels because they can more easily avoid conflicts of interest. In fact, RIAs operate under a stricter rules on dealing with clients, called the fiduciary standard, which means they must manage your money with your best interests at heart, not their own. In fairness, lots of broker-dealers are well-trained and well-intentioned (and outnumber RIAs, four to one). Yet for now, let’s focus on RIAs, and what you pay then.

Just as there are two categories of advisor, clients fall into two groups. It all depends on what kind of service you, the client, need. And that determines how advisors charge. The groups are:

Self-Directed. These are do-it-yourself investors who want an advisor to look over their shoulders and make suggestions. The investors run their own money, buying and selling holdings. They may use an asset allocation model, provided by the advisor. They want to make sure they aren’t risking blowing up their assets.

Deputizers. This variety of investors wants an advisor to administer their portfolios. They usually are not as well-versed in financial matters as the Self-Directed are, and feel more comfortable with an expert at the helm. They tend to pay the most for advisory services.

The Self-Directed often prefer to pay a flat fee. commonly around $1,000, to have an advisor examine their holdings and suggest possible changes. The advisor may run simulations, like Monte Carlo, to see what the odds are clients will have sufficient money to meet life needs, such as sending the kids to college and funding retirement. The advisor may propose a rejiggering of asset allocation, and will factor in such things as clients’ ages, incomes, family sizes and so forth.

Another route for the Self-Directed is a deeper work-up, forming a financial plan and paying an hourly rate. Since more labor is involved and the results are more comprehensive – an estate plan may be part of it, for instance – the payout to the advisor tends to be higher. Usual rates are $250 to $500 per hour, with the total outlay ranging from $3,000 to $5,000.

Deputizers pay a percentage of their assets to an advisor, trusting him or her to make the right choices. This is usually the most expensive alternative. It can run from 0.75% to 1.5% yearly. For a typical 1% rate on a $1 million portfolio, that means $10,000. Generally, the more assets you have, the lower the percentage you pay.

Obviously, the first question you should ask is how the advisor gets paid. But be aware that cheapest is not always best. Some advisors do not like to take on clients who comparison-shop among a batch of advisors, choosing the least expensive one. They believe the bargain-hunter clients are the first to leave if the advisor has a bad quarter. Every once in a while, even the brightest investing genius hits a pothole.

But on top of payment considerations, you the client want to ensure you are getting your money’s worth. Does the prospective advisor have professional education credentials, such as the Certified Financial Planner designation? Does he or she ask you the right questions, particularly what your goals are – protecting your principal or aggressively seeking to build your net worth? Does the advisor follow up periodically, seeing how things may have changed for you?

Make sure you feel personally comfortable with your advisor. One of the most common complaints from clients who ditched an advisor is that the person treated them as if the advisor were smarter than the client – and the client should blindly heed the advice. A good client-advisor relationship depends on a spirit of give and take, and a vital candor. If your advisor is an arrogant individual, that won’t happen.
 
Your money is important. Both what you accumulate for the long-term, and what pay right now to reach that goal.