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?
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.
Make sure to get in black and white what you are actually paying him and what you are getting for it in return. What you are being charged is typically based on the amount you have with your advisor. For your reference and comparison, here is what I charge my clients for managed portfolios.
I am here as a resource should you have any questions.
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.
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.