In an ideal relationship, your financial advisor should 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 financial advisor's services is 1.02% of assets under management (AUM) annually for an account of $1 million.
- An actively-managed portfolio usually involves a team of investment professionals buying and selling holdings–leading to higher fees.
- Financial advisors that offer passively-managed portfolios tend to have lower fees.
- Hiring a fee-based advisor, not a commission-based one, can also help lower the costs of a financial advisor.
How Financial Advisor Expenses Work
The average fee for a financial advisor's services is 1.02% of assets under management (AUM) annually for an account of $1 million. The industry average fee is 0.95% and decreases, depending on the size of your account.
However, high-net-worth individuals may pay less since the fee structure works on a sliding scale. "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, California. In other words, clients should expect to pay a maximum of $50,000 on a $10 million account. 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 they're 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.
A portfolio that's actively managed usually involves a team of investment professionals, headed up by a portfolio manager, that are actively engaged in monitoring the portfolio's performance and holdings. The process would involve buy, sell, and hold recommendations and trades designed to outperform the market, which is typically measured by a benchmark index, such as the S&P 500.
"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."
However, just because you can pay extra for active management doesn't mean you should. 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 actively-managed strategy, be sure to know what types of securities that the advisor will be investing in and whether those holdings align with your long-term financial goals and risk tolerance level.
Avoid Up-Front Loads
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." Upfront loads are sales and commission charges that investment managers or funds charge investors at the onset of investing money with them. 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
Although the goal is to reduce fees and expenses by as much as possible, it's important to consider the level of service and performance offered by the financial advisor being considered. Below are some effective tactics at cutting financial advisor expenses.
Fee-Based Financial Advisors
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. Exchange traded funds usually contain a basket of equities or bonds that mirror an underlying index, such as the S&P 500 or an index of U.S. Treasury bonds. This passive investment style requires less work from the investment advisor and usually results in lower fees for the investor.
Vanguard and Betterment
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.
Negotiate for Lower Fees
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.
Try a Newer Financial Advisor
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.