Are You Overpaying for Financial Advice?
We’re firm believers that anyone is capable of managing their own money successfully, but sometimes it can help to have an objective voice and expert guidance. Enter the financial professional.
A financial professional, like an advisor or planner, can help you lay out a financial plan, stick to your goals, and even help you manage your money, and that can be pretty valuable. However, their advice won’t be free, so you’ll want to make sure you’re getting good bang for your buck.
What am I paying for?
Financial advisory services vary from firm to firm and advisor to advisor, but for the most part, they fall into two general categories:
• Financial planning – helping you plan out and meet out your financial needs, and
• Asset management – helping you choose and manage the right mix of investments
It’s fairly common for advisors to offer a combination of the two services and to charge a percentage fee based on assets under management, meaning how much money you have to invest. The exact fee amount can vary, but these advisors will often charge an annual fee of about 1% of assets under management.
1%? That’s peanuts, right?
Not so fast. Those peanuts add up quickly.
Let’s say, for example, you have $500k to invest. A fee of 1% would be $5k per year, so after 10 years, you’ll have shelled out $50k to your financial advisor (it will actually be more as your investments grow over time).
Not to mention, some advisors will charge even more if your net worth is below a certain threshold. So if you’re paying, let’s say 2% on $200k of assets, you’re looking at about $4k a year, or more than $40k over 10 years.
Is it worth it?
Could be. If your advisor is hands on, helps you create a personalized and comprehensive financial plan, and regularly follows up to make sure you’re on track, then it’s easier to justify paying up.
But if your advisor simply puts your money in a basic portfolio allocation that you could have found for yourself online, then you may be better off doing a little research and investing on your own.
You could also consider using a robo-advisor, online software that helps you allocate your portfolio and manage your investments, typically for fees as low as 0.2% to 0.5%.
We should point out, the fees we have been talking about are at the advisor level only and you’ll also pay fees on the investments your advisor recommends. Most mutual funds and exchange traded funds charge an annual management fee, or expense ratio, of about 0.1% to 1%.
Higher fees don’t necessarily mean you’re getting better money management either, so you’re usually better off sticking with lower fee investments.
Finding a fiduciary
As an added wrinkle, some advisors receive commissions for recommending certain products, which means their interests might not completely align with yours.
This is why working with a fiduciary is a good idea. A fiduciary has an obligation to put your monetary interests ahead of theirs, so you won’t have to worry about your advisor being swayed by the promise of a fat commission.
No matter what, you’ll always want to be sure you know exactly how your advisor is compensated.
Alternatively, some advisors are fee-for-service, which means how much you pay is not tied to how much money you’re investing. This might be an hourly fee, an annual fee, or a flat fee for performing a specific task, like creating a financial plan. Fee-for-service can be a more affordable option than paying a fee based on assets under management and is inherently less likely to result in conflicts of interest that can arise when advisors are paid commissions for selling particular products.
However, even this can get expensive depending on the pricing structure. Let’s say you work with a fee-for-service advisor who charges $200/hour and you’ll need 10 hours of help over the course of the year, it will end up costing you $2,000, not a small amount of money.
You’ll also want to watch out for the term fee-based or other ambiguous terminology. This is not the same as fee-for-service, and may mean the advisor charges a fee but also receives commission for recommending certain products. Always ask if they receive commissions.
Do what’s right for you
Ultimately, you’ll want to figure out a strategy that’s right for you. If you know you’re unlikely to follow through on your financial goals on your own, then working with an advisor can be well worth the cost. On the other hand, if you’re proactive with your finances and willing to do a little leg work, you may be better off forgoing the fees.
Whether you decide to work with an advisor or go it alone, be sure to keep asking questions, do your research, and make sure you aren’t spending more of your hard-earned money than you have to.