My Advisor Charges 2% Fee But He Doesn’t Give Tax Advice.  I have an 0k Portfolio.  Am I Paying Too Much?

My Advisor Charges 2% Fee But He Doesn’t Give Tax Advice. I have an $850k Portfolio. Am I Paying Too Much?

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My advisor charges a 2% fee for financial advice. He does not provide tax advice. My portfolio is currently worth about $850,000. Is it worth paying for?

– Tim

Without knowing the full scope of services provided by the advisor, 2% may be too expensive for a portfolio of your size and for a relationship where tax advice is not provided. This immediate, high-level evaluation is based on benchmarks for typical advisory fees, which we’ll explore shortly. To fully evaluate the fairness of any financial advisor fee, you must consider several important criteria: the advisor’s fiduciary status, how the advisor is compensated, as well as the level of customization and complexity required. in your situation. There are, of course, other criteria to look at when evaluating advisor fees, but these three tend to be the main drivers.

If you’re looking to work with a financial advisor, SmartAsset’s matching tool can help you connect with up to three who serve your area.

Understand the Fiduciary Status of a Financial Advisor

One of the first questions you should ask a prospective advisor – no matter how important the fees are to you – is whether he is acting as a fiduciary. There is a significant difference between fiduciary financial advisors, financial planners, and brokers or other sales representatives. Financial advisors acting as fiduciaries are held to a legal standard that requires them to act exclusively in the best interests of the client. A financial planner may offer the same comprehensive planning services as a fiduciary advisor, but they may not legally act as a fiduciary. And while broker-dealers must also act in the best interests of clients, they are not held to a fiduciary standard.

Although somewhat subtle on the surface, these differences can affect your experience working with an advisor, the fees you pay and the compatibility of fees. These differences can be further muddied by ambiguous job titles – for example, a stockbroker may have the word “advisor” in his title. So it’s best to ask during the interview process if the individual is acting as a fiduciary.

You can also look at other resources such as personal certifications and company registrations. Certified Financial Planner (CFP®) professionals and registered investment advisors (RIAs) are two common indicators that an individual and company are held to a fiduciary standard. (And if you need help finding a fiduciary advisor, this free matching tool can help you.)

Review How the Advisor Gets Paid

A financial advisor explains his fee structure and how he gets paid to a couple of prospective clients.A financial advisor explains his fee structure and how he gets paid to a couple of prospective clients.

A financial advisor explains his fee structure and how he gets paid to a couple of prospective clients.

Advisors can be compensated in several ways. Some charge a fixed-dollar fee while others charge a percentage fee based on assets under management (AUM), as was the case in this situation. However, some advisers may receive compensation beyond these arrangements: commissions from the sale of investment and insurance products are a common example.

According to AdvisoryHQ, the average advisory fee ranges from 0.59% to 1.18%, depending on the assets under management. Higher percentage-based fees are usually associated with smaller portfolios, and vice versa. For an $850,000 portfolio, this data shows an average fee of more than 1%. However, this does not account for commissions or other sources of income your advisor may have, which may increase your fees.

In addition, these ranges do not factor in fees for the underlying investments, which are typically not paid by the advisor unless the advisor manages real estate investment products in your portfolio. For example, if an advisor allocates assets to various third-party investment products when building a portfolio, the fees you pay to own those products will go to the third-party asset managers.

The underlying investment fees depend on the types of strategies and fund structures included in your portfolio. So, if an advisor charges 1% for their advisory fee and your portfolio consists of various funds that each charge a 1% expense ratio, you might be paying 2% in advisory. and investment fees.

This can be confusing, so it’s important to understand if your advisor is quoting an all-in fee. If so, ask if they receive all of the fees or only the portion unrelated to the underlying investments in your portfolio. (Remember that many financial advisors can provide comprehensive financial planning and not just portfolio management.)

Assess the Complexity of Your Advisory Relationship

Based on the advisory fee data presented in the previous section, 2% may seem high, especially if it does not include the underlying investment fees that go to third-party asset managers. After evaluating an advisor’s fiduciary status and how they are compensated, you’ll want to consider the level of complexity and customization required for your situation.

High-touch, customized and complex financial advice is likely (or at least should be) more expensive than generic, off-the-shelf services. For example, working with an advisor who is on-call and building a comprehensive financial plan and investment portfolio tailored to your unique goals should increase the cost. Involving complex planning elements such as trusts or private foundations can increase costs.

On the other hand, large asset managers that offer advisory services may charge low fees, but do not offer financial planning services. They can also build portfolios using internally managed funds, allowing them to generate additional income to offset low advisory fees. This indicates potential conflicts of interest. Similarly, advisors who only manage investments and do not provide strong financial planning advice should cost less. (If you want more help managing your investments or need a holistic plan to manage your wealth, consider working with a financial advisor.)

Next Steps

A couple shake hands with their financial advisor at the end of a meeting with him.A couple shake hands with their financial advisor at the end of a meeting with him.

A couple shake hands with their financial advisor at the end of a meeting with him.

Fees are very important and should remain an important consideration when choosing a financial advisor. Benchmarking a prospective advisor’s fees against industry averages – taken in the context of fiduciary status, what the fees are and the complexity of your financial needs – is an important exercise that can help you to understand each advisor’s proposed fee.

If you still have concerns after comparing your fees to benchmarks, it’s absolutely worth asking your advisor to have a transparent conversation aimed at better understanding his fees. You can politely frame the conversation as an opportunity to learn more about how the scope of their services — including financial planning and investment advice — informs the advisor’s fee schedule. .

Fees represent only one part of the decision, however. The best counselor for you ultimately depends on what you’re looking for in a relationship and how you rank those priorities. If paying the lowest fees is your top priority, then that should drive your decision. But understand what a low fee can mean in terms of service, interest alignment and customization. If you prioritize other aspects of the relationship over cost, then the elements of a partnership may help you get comfortable with higher fees. (And if you need help finding a new advisor, consider being matched with one for free.)

Tips for Finding a Financial Advisor

  • As you do your due diligence on financial advisors, it’s important to talk to several different professionals and ask about different elements of their business, including what services they offer, how much they charge for services , as well as their fee structure. Here’s a look at 10 questions you’ll want to ask an advisor you’re thinking about hiring.

  • Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free initial call with your advisor matches to decide who you feel is the right fit. suits you. If you’re ready to find an advisor who can help you achieve your financial goals, get started today.

Jeremy Suschak, CFP®, is a SmartAsset financial planning columnist who answers reader questions on personal finance topics. Got a question you’d like answered? Email [email protected] and your question may be answered in a future column.

Jeremy is a financial advisor and head of business development at DBR & CO. He was paid for this article. Additional resources from the author can be found at dbroot.com.

Please note that Jeremy is not a participant in the SmartAdvisor Match platform, and he was paid for this article. Some reader-submitted questions have been edited for clarity or brevity.

Photo credit: ©iStock.com/kate_sept2004, ©iStock.com/

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