Are you getting what you pay for when it comes to your financial advice?
Warren Buffett famously said, “Price is what you pay, but value is what you get”. This seems logical, but in a world of confusing statements and hidden fees, such as the investment world… how can you know if the price is worth the value received.
Financial Advisors of decades past were in the business of product sales, with commissions as high as 7%, sometimes more. Today many mutual funds are no-load or are offered on an advisory platform that waves commission and 12b-1 marketing fees. There are fee-based annuities, though personally, I have not seen many of them.
For the sake of this article, let us say we are hiring someone that offers fee-based advice. It is possible you find an advisor that charges a fixed consulting fee or an hourly fee, but these structures are not currently popular. How do you compensate your advisor? According to regulatory filings, many firms charge a fee to generate a financial plan. These charges can range from $1,500 to $10,000 or even more depending on the complexity of the plan.
We offer this service as an investment in our future relationship with all new prospects. We have found that, when we do a financial plan from the start, both advisor and client have a greater understanding of one another’s goals.
When it comes to investments, the fee-based advisor charges a fee for advice based on the portfolio size, this is called Assets Under Management (AUM) fee. Popular personal financial blogger Michael Kitces found the following graphic about AUM advice fees charged by advisors ranging from 0.50% to 1.25%, depending on account size. Most of the major custodians show this fee on your monthly statement. The industry standard is for ¼ of the fee to charge on a quarterly basis. As we can see, the fee is generally decreased as portfolio value increases.
This fee is, on average, around 1%. It is meant to cover the advice and services provided by the advisor. Other fees that may be charged in excess of your advisor’s fees are trading and custodian charges if you own individual stocks. If your investment portfolio is composed of exchange traded funds or mutual funds, there are additional costs. These fees cover management of the funds, trading, and even marketing expenses. Websites like Morningstar.com or personalfund.com, will show you the true cost of the fund which is often an additional 1% or more for mutual funds. The other costs are a bit harder to find and often require digging through the large prospectus books sent to shareholders. Thankfully, blogger Michael Kitces did the research for us. Below is the average “all in” cost to manage a portfolio broken down by portfolios size. For instance, here we see the average all-in cost for a $1-2 Million dollar asset level is about 1.75%. When considering this cost, think about the following: Is your advisor quarterbacking your financial, tax and estate planning with other trusted professionals? Is your advisor offering behavioral coaching, periodic rebalancing of strategies, educational events, and communications (like blogs and podcasts)?
The answer to the ‘Fee VS Value’ question is not as straightforward as some advisors would have you think. Financial planning is complicated, let alone the added stress of hidden fees. Lots of marketing dollars have been spent to show cheaper is better and while there is math to support this, I like to listen to the Oracle of Omaha when he says, “Price is what you pay, value is what you get”. This echoes something my father taught me growing up; buy cheap, buy twice. When it comes to your retirement, you may not be able to “buy twice”.