In an ideal relationship, your financial advisor will be happy with what you're paying. But what if you feel you're paying too much? Financial advisors don't want to charge so much that they drive away business, but they don't want to charge so little that their services don't appear valuable. Here's a look at what you should pay for financial advice and investment management, what you should get for that price, and how you can pay less for it.
The average fee for a professional financial advisor's services is 1.02% of assets under management annually for an account of one million dollars (the industry average fee is 0.95% and decreases depending on the size of your account). For high-net-worth individuals, however, the appropriate fee may be lower. "A reasonable fee would be 1% at $1 million down to 0.50% at $10 million and 0.10% thereafter," says Ryan T. O'Donnell, CFP, wealth manager and founding partner of the O'Donnell Group in Chico, Calif. In other words, clients should expect to pay a maximum of $50,000 on a $10 million account, he says.
Online advisors have shown that a reasonable fee for money management only is about 0.25% to 0.30% of assets, so if you don't want advice on anything else, that's a reasonable fee, O'Donnell says. An advisor should be able to explain how he or she is adding value for any amount charged above those rates. Is the advisor acting as your personal CFO, for example, and helping with tax planning or estate planning? Is he or she evaluating where you are vulnerable from an asset protection standpoint? Or is the advisor helping you ensure your charitable gifts have a bigger impact? Input at that level goes beyond money management to the burgeoning realm of wealth management.
"Expect to pay more for actively managed portfolios," says David P. Sims, a certified public accountant and registered investment advisor with Virginia-based RidgeHaven Capital LLC. "If the investment advisor puts more effort into beating the market, then clients should expect to pay a higher fee for assets under management."
Just because you can pay extra for active management doesn't mean you should, however. According to a Vanguard study, "active fund managers as a group have underperformed their stated benchmarks across most of the fund categories and time periods considered." Plenty of other recent studies have similar findings. Nonetheless, the Vanguard report acknowledges that "a very talented active manager with a proven philosophy, discipline and process, and at competitive costs, can provide an opportunity for outperformance." If you're going to hire a financial advisor with an active management strategy, you would be wise to choose him or her extra carefully.
Other things to avoid are "big upfront loads and other silly fees that often accompany products being sold by select brokers," says Jacob Lumby, a graduate associate instructor of personal financial planning at Texas Tech University. "In today's low-cost investment world, there is no place for loaded mutual funds or related products. Fees are one of the leading indicators of investment results. Low fees result in more money in your investment account and a bigger legacy to pass on."
Value for Your Money
For the traditional 1% fee, clients can expect asset management services and a full financial plan that is updated at least annually, Lumby says. Some firms provide tax-planning services at no additional cost, but many partners with accounting firms for all tax-related services, which will cost you extra. The same is true of legal services, he adds. "For high-net-worth clients with advanced planning needs, these fees can be worthwhile," Lumby says. "They need high-touch, custom plans with many different professionals involved." High-net-worth clients are very sophisticated, and they're also very busy, O'Donnell says. They aren't going to pay fees for the value they aren’t getting, but peace of mind and less stress can make a financial advisor’s fee worthwhile.
Pay Less for Quality Financial Advice
You've probably heard this before, but the best way to make sure you're getting unbiased financial advice that's in your best interest is to hire a fee-based advisor, not a commission-based one. Fee-based advisors have a greater incentive to grow their clients' assets, according to Sims. "In the long run, this is a win-win solution for the client and the advisor," he says.
"If a client wants to reduce fees to razor-thin levels, some advisors will manage ETF-based portfolios that track different sectors of the market," Sims says. This more passive investment style requires less work from the investment advisor.
Alternatively, if you want to work with a professional advisor, but you don't need highly personalized service, Lumby suggests looking at Vanguard's Personal Advisor Services, which allows full access to an accredited financial advisor, a unique financial plan, and ongoing wealth management for a fee of 0.3% of assets managed annually (with an account minimum of 50,000). And if you need only portfolio management, not financial planning or advising, consider wealth management services like Betterment, where the fee is just 0.25%–0.40% of assets.
Another way to pay less is to negotiate a financial advisor’s fee. Be prepared to explain why you feel it is too high and why it makes sense for the advisor to take you on as a client for less than what the firm normally charges. If you like the advisor but want fewer services than they typically provide for a client, they may be able to justify charging you less. The same is true if you’re bringing them more assets than they typically manage.
You could also take a chance on a newer advisor. "Often, they know they can't demand top dollar, and are hungry, need the business and are willing to dicker," says Gary Silverman, CFP, founder of Personal Money Planning in Wichita Falls, Tex., where he serves as its investment advisor and as a financial planner. While you might get what you pay for, you’ll probably get more attention, says Silverman, "and folks that are new usually know they are a bit ignorant, so they'll study hard before handing you a recommendation." He adds, "Just because someone has been doing this for three years doesn't mean they do a poorer job than someone who's been at it for three decades."
The Bottom Line
When looking for a new financial advisor or deciding whether to stay with your existing one, remember that you're looking for the advisor who provides the best value, which will not necessarily be the one who comes at the lowest price. Think about what services you really need and how much they're worth to you, then find a financial advisor who fits your criteria.