How do I determine if I am being fairly charged by my financial advisor?
How do I know if my financial advisor is charging me a fair rate for managing my portfolio? He set up my inherited portfolio 25 years ago. Does he base his fee on a percentage of the value of my portfolio? What is the industry standard for fee rate?
First, determine whether your advisor is a securities salesperson or a fee-only advisor. Here are some clues that can help you: If your advisor has the title "registered representative", or if you see the phrase "securities offerred through..." then your advisor is really a salesman. A salesman is not qualified or paid to give advice. It will be difficult to determine what you are paying, because the brokerage industry is quite experienced at hiding compensation numbers. Regardless of what you are paying to a salesman, the value is questionable, because the true cost of buying and selling investments is near $0, and the "advice" is typically given as a tool to steer you into the investments being sold.
If instead, you see the words "fee only", or NAPFA member, then you have a fee-only advisor. This advisor is a fiduciary, and is qualified and paid to give advice. A fee only advisor is typically transparent with fees, and it should be easy to figure out how much you are paying. There are a few different ways that advisors charge, but far and away the most common is as a percentage of fees under the management of the advisor. Typically, a fee-only advisor charges in the range of 1% for the first million dollars, and lesser percentages for amounts over that. This fee should buy you more than investment management. It should include advice on your entire financial life. The advisor should oraanize your finances through financial statements, projections, and written action plans. The advisor should also coordinate a team of professionals that advise you in the areas of lending, insurance, income taxes, and estate planning.
You should see the fees being deducted from the money market portion of your accounts on a monthly or quarterly basis. To find a fee-only advisor's fee schedule , evaluate the firm's ADV form, which can be found at https://www.adviserinfo.sec.gov.
If you financial advisor is not giving you full disclosure of all fees you are paying then I would seriously consider another advisor. Whether you have asked him and not received a straight answer or if you do not feel comfortable enough to ask would be reason enough.
The following are differing structures most financial advisor use:
- Percentage of assets that they manage on your behalf, typically anywhere from 1% - 2% per year. The more assets you have, the lower the fee.
- Commissions paid to them from financial products you buy through them.
- Combination of fees and commissions.
- Hourly rate.
- Flat fee to complete a specified project.
There are times that the percentage of assets is appropriate then there are other times that a commission is to your advantage. Personally, I use both. It depends on the client and the client's assets. This is a subject that should be discussed prior to investing or entering into a relationship with an advisor.
It is important to always ask a financial advisor for a clear explanation of how they will be compensated before you hire them. This is one question you would want to ask any potential financial advisor. Look for an honest, straight-forward answer and avoid "advisors" who try to avoid the question.
A good part of the answer to this question is who this "financial advisor" actually is. Is the person a registered representative of a broker/dealer or a registered investment advisor? The difference is critical. With respect to advice to clients, the former is under a much more lenient standard. That standard is suitability. As long as the recommendations are suitable for the client, even if they are not in the client's best interest - which often means too expensive), they meet the standard. A registered investment advisor, on the other hand, is required to make recommendations that are in the client's best interest.
Since this portfolio was set up a quarter century ago, there has been more than enough opportunity to learn what fees are being charged. If the advisor is a registered representative, it's entirely possible that there have been ongoing commissions for transactions that have been made along the way since it is inconceivable that a portfolio set up that long ago has remained unchanged. Each time a transaction was made, you should have received a printed confirmation of the details, including fees involved. If in addition there was an overall management fee involved, that would appear on the periodic statements you received from the brokerage house.
Rather than speculating, I suggest you ask the advisor the specifics of the fees you are being charged. If the fee is based on a percentage of the value of assets under management, it should be no higher than 1%. It could be significantly lower if the asset total is $1 million or more, though these days there are advisors already under 1.00% for smaller accounts.
If the charges are commission-based, I see no reason to pay more than $10 per transaction.
Once you have the answers to your questions, you need to take a hard look at whether to continue this relationship. At a minimum, you should consult with a registered investment advisor to make an assessment of the value received from your current advisor over the 25-year period. You need to get a much better understanding of what you are paying and what you are getting for it.
Without looking at a statement, it would be difficult to say how he is charging you. He can charge you either as a fee based on your assets, or he may have charged you commissions on investments. A standard fee is in the range of 1%, but investors are demanding more services and value for the money they are paying an advisor.
Instead of focusing solely on the fee he is charging you, I would recommend you take note of what he is actually doing for that fee. Does he providing comprehensive finanical planning? Does he help with year end tax planning to reduce taxes? Is he reviewing estate planning documents, insurance policies, annuities, etc.? Do you believe he is giving you sound, unbiased advice? These are just some things for you to consider when evaluating your current advisor.
It never hurts to get a second opinion, and sit down with a finanical planner to review your current situation and fees. You may find your current advisor is doing all the right things for you, and you might learn some new things a planner might be able to help you with.
I hope this helps.
All financial advisors can be divided into two classes of financial professionals. 1) Registered Investment Advisers (RIAs) established by the Investment Advisers act of 1940; and 2) Broker/Dealers established by Securities Exchange Act of 1934.
RIAs are held to a Fiduciary standard by law which means they must act in the client’s best interest above the interest of themselves or others. RIA’s must disclose fees, and all potential conflicts of interest. They must provide a disclosure brochure called the ADV Part 2A, and 2B. The Part 2A explains their firm and the 2B explains the individual advisor. These brochures explain how they get paid, their education, training, experience and if they have been subject to any disciplinary action.
With an RIA you will know what it is costing you. Most work for a percentage of assets under their management (AUMs), some for a flat fee, or hourly rate. They will also explain what the trading fees and management fees are for the funds they recommend. Being paid by commission is difficult for a fiduciary so most don’t receive commissions. Even if they do they must disclose these commissions in advance.
Broker/Dealers, and their advisers (called Registered Representatives) are not held to the fiduciary standard but to a lessor standard of suitability. A B/D firm can receive commissions and is not required to give you a disclosure brochure ADV nor disclose potential conflicts of interests in advance. You must go check them out on your own at the FINRA website. Some B/D firms have created corporate RIA firms and their representatives can represent both which can cause some confusion (Who are the representing and when?).
As of 2015 there were over 305,000 financial professionals working for B/D firms verses about 32,000 RIAs. Most of the RIA firms are small independent firms while most of the big well-known names are B/D. Ask your adviser which type of firm he/she works for, and ask them to explain all fees and charges and how they get paid. Since I am an independent RIA I naturally think you should do business with an RIA. Good luck, I hope this helps.