I can promise you financial advice is almost never 'free,' but there are 2 ways to sniff out the real price

  • Many companies advertise “free” financial advice, but there’s always a cost.
  • Some advisors earn a commission on the products they sell or take a percentage of your investments as a fee.
  • Always choose the right financial professional for your needs, and ask them exactly how they get paid.
  • Set up a no-obligation virtual consultation with a fiduciary Financial Advisor to see how you can grow your portfolio »

I had a horrifying call with a rep from a financial services company recently. The company promises “free financial plans for everyone” and say they give “unbiased advice,” so I was excited to learn more about what they do. They say they’ve provided free financial plans to more than 200,000 people. Sounds good right? I’ve spent my entire career trying to provide high-quality, unbiased financial advice to as many people as possible, both in private practice and in fintech, so their mission deeply resonated with me.

But then they told me what they really do. The real story is that they collect data from anyone who gets a free financial plan, and sell it to advisors who then try to “make a sale,” which means sell the person a mortgage, insurance policies, annuities, or investment products. And those advisors pay a lot for that user data — up to $1,299 per month! 

I asked the company rep if the users who get a free plan from their website expect to hear from an advisor. He said, “No, they don’t. It’s definitely not a hot lead. They don’t expect to hear from someone. But we’re not breaking any laws.” He boasted of “rookie advisors closing new business just by following the script.” 

Fees for many financial products are hidden

Although this company’s approach is particularly egregious, much of the financial services industry is built on doing some form of financial planning “for free,” and then making money on the sale of products and services like permanent life insurance, mortgages, investment commissions and trails, and annuities. And most of those products have embedded commissions and fees paid to advisors that clients never see, or have to look really closely to find, so in many cases clients never really have clarity on how their advisor gets paid. 

So why is the industry set up this way? Well, because it’s easier to get people to pay fees if they don’t know about them or don’t see them, and that makes it easier for financial advisors and financial services companies to make money. 

For example, the commission on a $1 million permanent life insurance policy could be upwards of $10,000-$15,000 to the advisor selling the policy, but clients don’t have to write the check. Instead, the insurance company writes the commission check to the advisor, and the client pays the insurance company back through embedded contract fees over time. 

Here’s another example. At a fee of 1% annually, which is about average, you’d pay $5,000 annually to have an advisor manage a $500,000 portfolio. But by deducting asset management fees directly from your investment accounts, the fee becomes much less noticeable than if you were to instead write a $5,000 check every year. And doesn’t it sound better for a financial advisor to say he has a “$500,000 minimum” than to say he has a $5,000 minimum annual fee? Charging percentage-based asset management fees is a reasonable way to charge for asset management advice, but it’s harder for you to see what you’re paying.

2 ways to know how much you’re paying for financial advice

So if you’re looking for advice from a financial advisor, here’s what I recommend.

1. Choose the right financial professional for your needs

Get clarity on what you actually need. Knowing what you need from a financial advisor (and what you don’t) will help you narrow down your search.

If you’re looking for someone to do comprehensive financial planning with you to provide unbiased advice on everything from your budget to retirement to your estate plan, and to be a thought partner on financial decisions, look for a certified financial planner who charges a flat annual, monthly, or hourly planning fee. 

If you just need someone to manage your assets for you, look for someone who charges a percentage of assets under management of 1% or less, and make sure you’re doing the math to figure out how much you’re really paying each year, even if it’s coming directly from your investment accounts. Keep an eye on the expense ratios of the investments within your account as well and look to keep those under 0.5%. A robo-advisor can be a great option here, too, especially if you’re at least five to 10 years away from retirement. 

If you’re looking for insurance or annuity products, look for someone at a highly-rated insurance company or a broker who can compare multiple insurance companies on your behalf. 

2. Ask advisors how they get paid

Next, ask every advisor you speak with exactly how they get paid — all the ways they get paid. Ideally, look for someone who publishes their fees on their website. And if they can’t provide a clear answer on how they get paid that you understand, find someone else. 

Last, ask whether the advisor is a fiduciary. Being a fiduciary means the advisor is required to look out for your best interests, not their own bottom line, and that they’re required to disclose conflicts of interest to you.

Remember, if it sounds too good to be true, it probably is. If someone offers to do financial planning for you for free, there’s more to the story. Find out how they’re really getting paid, and don’t be afraid to walk away if you don’t like the answer.

Natalie Taylor, CFP, BFA, draws on 15 years of financial planning experience, seven years in fintech, and a decade of professional speaking to share advice that works in real life, not just on paper.

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