In the realm of investment management, costs can vary significantly, with fees ranging from as little as 0.25% of your portfolio’s value to a more substantial 1% or even higher for financial advice. The question arises: Are you truly getting your money’s worth for the advice you receive? The truth is, many individuals could be receiving more comprehensive services for less money.
Financial advice covers a wide spectrum of services, primarily falling into two categories:
- Investment Management: This entails the careful selection of the right mix of stocks, bonds, and cash.
- Financial Planning: This encompasses a broad range of services, from budgeting guidance to estate planning.
Traditionally, comprehensive financial planners have offered both investment management and planning services, typically charging a percentage of the assets they manage. Recent surveys of nearly 1,000 financial planners conducted by Inside Information, a respected trade publication, reveal an interesting trend. The larger the portfolio, the lower the percentage of assets clients pay. For portfolios under $1 million, the median annual charge is 1%, which reduces to 0.5% for portfolios ranging from $5 million to $10 million. It’s worth noting that the survey focuses on independent advisors who primarily charge fees, as opposed to brokers or insurance agents who often rely on commissions.
Robo-Advisors: A Cost-Effective Alternative with Limitations
The rise of robo-advisors has put pressure on the investment management aspect of financial services. Robo-advisors are automated platforms that make investment decisions based on sophisticated algorithms. Providers such as Betterment, Wealthfront, Vanguard, Fidelity, and Schwab typically charge approximately 0.25% of the portfolio’s value. Some of these services combine automated investing with access to human financial planners. For instance, Vanguard Personal Advisor Services charges 0.3% for investment management along with access to a human advisor via phone, while Betterment’s premium service charges 0.4%.
However, it’s important to realize that being able to ask questions through these services doesn’t equate to receiving comprehensive financial planning.
A comprehensive financial planner typically engages clients in in-depth interviews to uncover their financial goals, assess their assets and liabilities, evaluate income and expenditure, and determine necessary adjustments for greater financial success. Comprehensive planners examine various aspects of their clients’ lives, including insurance, taxes, retirement planning, college savings, employee benefits, and estate planning.
If you’re paying 1% for these comprehensive services, you’re likely receiving good value, especially if the advisor maintains regular check-ins and assists you in addressing new financial challenges. On the other hand, if you’re solely receiving investment management, it’s probable that you’re overpaying.
Is Your Advisor Earning Their Keep?
Bob Veres, the publisher of Inside Information and a seasoned observer of the financial planning industry, suggests that any advisor who merely offers a well-allocated portfolio and periodic statements is overcharging if their fees exceed 0.5%. Conversely, those who provide full-service financial planning for less than 1% of assets under management are, in his view, underpaid.
Most advisors managing portfolios worth less than $1 million charge fees ranging from 1% to 2% of assets under management. This may be reasonable if clients receive extensive financial planning services. However, some advisors charge in excess of 2%, with a few going beyond 4%. It’s challenging to justify such high costs.
It’s important to note that advice fees are in addition to the expenses associated with the underlying investments, which can vary significantly. Some exchange-traded funds and index funds have fees of less than 0.2%, whereas variable annuities can cost 2% or more. The costs associated with financial advice are crucial because they can significantly reduce the overall accumulation of wealth over time.
Seeking Affordable Options
Even when fees are justifiable, they may not be affordable for everyone. Comprehensive financial planners who charge a percentage of assets under management often require clients to possess portfolios in the six- or seven-figure range. Those who charge retainer or planning fees may demand thousands of dollars annually.
For individuals who are not affluent or who are just embarking on their financial journey, consider adopting an automated approach for your investments. This could entail using a robo-advisor or opting for a low-cost target date retirement fund that makes investment decisions on your behalf. When you require comprehensive financial planning assistance, such as determining how to utilize your retirement savings or selecting the right insurance policy, it might be wise to hire a fee-only financial planner who charges an hourly rate. While the advice may not come cheap, with an average cost of around $150 per hour, it could represent the best value for your money.
In conclusion, it’s essential to be discerning when it comes to the cost of financial advice. Understanding the services you are receiving and the fees associated with them can help you make more informed decisions and ensure you are getting the best value for your financial needs.