I Have .2 Million Invested With My Advisor Who Charges a 1% Fee. Am I Paying Too Much?

I Have $2.2 Million Invested With My Advisor Who Charges a 1% Fee. Am I Paying Too Much?

When it comes to advisor fees, there are two numbers to keep in mind: 1% and 0.02%.

The first is the average fee that financial advisors tend to charge. If you are looking for comprehensive financial management, in general you should expect to pay about 1%. The second is a representative fee for a well-indexed S&P 500 fund. If you are only looking for investment management, someone to grow your portfolio, this is the number they need to compete with.

Here, let’s assume you have $2.2 million in assets. Your financial advisor manages all of that and charges a fee of 1%. That might be a good, albeit not great, price depending on what you are looking for.

If you’re interested in exploring how a financial advisor can help you, you can speak to a fiduciary advisor for free.

How Are Advisor Fees Structured?

As an industry, financial advisors have four main fee structures. Most advisors use a combination, charging different fee structures for different services.

Flat Fee

This is a fee-for-services model. The financial advisor will charge you a fixed fee to work on a specific project. For example, they might charge you a flat fee to do your taxes.

Hourly Rate

Here, the financial advisor bills for each hour worked. Most will measure their work in six minute increments, the standard for professional services in the United States. For example, they might charge you an hourly rate for general financial planning services.

Hourly rates can also be structured under a retainer model, where you pay a fixed amount up front and then receive services billed against that initial payment.

Commissions and Performance

Under a commission structure, the financial advisor receives payment each time they conduct a financial transaction on your behalf. Typically this is measured as a percentage of that transaction.

Under a performance structure, the financial advisor receives an additional payment if they meet a specific financial benchmark. For example, they might receive a performance payment for beating the S&P 500’s returns in a given year.

Commissions, in particularly, are an increasingly disfavored fee structure.

Assets Under Management (AUM)

This is very common, and it’s what people mean when they say that they are paying “X%” to their financial advisor. Here, the advisor charges a percentage of the assets that they hold and manage on your behalf.

Typically, this is charged on an annual basis. For example, say that your financial advisor charges 1% and manages $100,000 on your behalf. That year, they would charge you $1,000.

Ultimately, advisor fees are at the discretion of the advisor, their firm and you. You and your advisor should get an understanding of your goals and personal circumstances, and then you can negotiate the fee structure. If you’re thinking about using a financial advisor, you can speak to one for free.

What Should You Pay?

So how much should you pay for financial services? Specifically, is a 1% management fee too high for someone with more than $2 million on deposit?

Well… it depends.

The simple answer to this question is, more or less, no. Given the size of this account, you might be able to shop around for a discount. But in general, a 1% management fee is right in line with market averages. Typical financial advisors might charge between about 0.5% on the lower end and 2% on the higher end, but 1% is not unusual.

The more complicated issue is, are you getting your money’s worth?

As the SEC notes on this subject, management fees might sound small, but they can add up quickly over time. To put this in perspective, say that you put your $2.2 million money into average return of around 8%. Over 10 years, with a 1% AUM, you would pay about $250,000 total over time in management fees. 

It’s possible that this fee may end up paying for itself with active portfolio management if your advisor can outperform the market. By contrast, you could bought an S&P 500 index fund. Those tend to cost about 0.02% per year. The benefit is that it’s a cheaper. The disadvantage is that you may be missing out on professional insight and management that could benefit your portfolio and beyond.

If your financial advisor is simply making investments on your behalf and not actively managing your portfolio, then, there’s a good chance that your 1% fee isn’t really worth it. However, a good financial planner isn’t solely limited to investment management, depending on the scope of your agreement, and they can be providing value elsewhere.

Look to the other services your financial advisor offers. Do they help with long term planning? Are they giving your advice to build both general and targeted wealth? Do they offer tax services, estate planning and other advice? Basically, do they offer something besides making investments on your behalf?

This is the critical issue when it comes to whether your 1% fee is too high. Fee differences very rarely lead to better portfolio returns, since it’s quite rare for professionals to ever beat the market. So instead, look at what you want out of this relationship in total. If you feel like you have received sound advice across a broad range of financial planning, security and services, then this sounds like a strong professional relationship at a fair price.

If not, you might be better off with an index fund and a copy of TurboTax.

Talk to a financial advisor for free to understand how they may be able to help you reach your goals.

What Services Do Financial Advisors Provide?

A financial advisor is someone who helps you manage your money and other assets. Among other services, a financial advisor can help clients with:

  • Investment or portfolio management

  • Long-term financial planning

  • Tax advice and preparation

  • Budgeting and financial goals

The exact nature of your relationship with a financial advisor will depend on their services and your needs. For example, some may work literally only in an advisor capacity. In this case, the financial advisor will not help you with any actual transactions, but will only give advice about what you should do.

Other advisors may work on a more comprehensive basis. They may offer accounting services and tax preparation, say. Or they may offer portfolio and asset management, actively holding your money on account and making investment decisions on your behalf.

When you seek out a financial advisor, it’s important to look for someone who fits your needs. You don’t want to pay for unnecessary services; for example, most households have simple taxes and don’t need professional preparation. On the other hand, you don’t want a relationship that doesn’t achieve all of your goals either.

The Bottom Line

A 1% management fee is well within the average for most financial advisors, who tend to charge around 0.5% and 2% for their services. The bigger question, though, is whether you feel like you’re getting what you pay for because, even at small percentages, those management fees aren’t cheap.

Tips On Finding A Great Financial Advisor

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