Are you paying too much for investment advice? Using the following checklist could save you thousands each year…
Check Form ADV Part 2A. The SEC requires registered investment advisors to detail fees and services in this document. Your registered investment advisor (RIA) should have given this to you at your initial meeting, but you can download it at AdviserInfo.SEC.gov or from the advisor’s website.
The most common fee structure is the assets under management (AUM) model. Annually or quarterly, you pay a fixed percentage of the amount of assets the advisor manages for you. This aligns your advisor’s interest with yours—the better your portfolio does, the better you both do. The AUM model includes investment advice and portfolio management…wealth-management services such as retirement projection updates…tax and Social Security planning…and reviewing estate-planning documents.
Other advisors use the retainer model—the client pays the advisor a fixed amount each year, regardless of the portfolio’s performance. Problems: Clients would not be happy paying a fixed retainer in a year like 2022, when portfolios took a hit. The advisor would earn the same, while the client pays a greater percentage of his/her declining portfolio. Also, a new fee is negotiated each year, based on the time spent in the prior year.
Compare your advisor’s fees to others. A national study by AdvisoryHQ found that investment advisors charge an average 1.02% on $1 million in AUM, or about $10,200 in annual fees (not including underlying expenses charged by mutual funds you may invest in or transaction costs). Asset-based fees come with breakpoints depending on account size. Examples: A $500,000 account might charge a 1.5% fee…a $5 million account, 0.65%. The larger the account, the lower the fees.
Caveats: If you need an advisor for specific advice, it may be more cost-effective to find one who charges by the hour—from $100 to $300 per hour, depending on the advisor’s credentials, etc.
If you have a large asset balance that will continue to grow, consider a planner who offers a fixed-fee structure in which you pay a certain amount each year.
Ask your advisor to lower his/her fees. Many advisors are willing to negotiate for particular reasons, including that you’ve been a loyal client for years…family members have a significant sum at the firm…you’ve recommended clients. Also ask what services you can drop to save money. Example: Now that you have retired, your portfolio doesn’t require as much maintenance as in the past. In such cases, some advisors drop their fee by one-quarter of a percentage point or more.
If your advisor is not willing to negotiate fees: Consider how satisfied you are with the services and how much money you stand to save elsewhere. To find advisors who offer comparable services but charge lower rates, go to the website of The National Association of Personal Finance Advisors (NAPFA.org).
If all you want is bare-bones service to create a portfolio and rebalance it regularly, consider mutual fund giant Vanguard, which charges as little as 0.3% of assets annually or web-based firms such as Betterment.com and Wealthfront.com, which charge 0.25% of assets each year.
