Discover the true cost of financial advice in this informative blog post. Learn how to avoid overspending and make informed decisions when it comes to receiving assistance in picking investments or creating a comprehensive financial plan. Don’t miss out on essential tips that can save you money and help you achieve your financial goals.
Are you unknowingly paying too much for financial advice? In this informative blog post, we explore the crucial difference between receiving assistance in picking investments versus creating a comprehensive financial plan. Discover the key factors that determine the cost of each service, allowing you to make informed decisions and avoid overspending.
Investment management can cost as little as 0.25% of a portfolios value each year. Yet many people still pay 1%, or even more, for financial advice.
Whether theyre getting a good deal depends on exactly what they get in exchange. Spoiler alert: Many should be getting a lot more, or paying a lot less.
Financial advice can encompass a lot of different services, which fall primarily into two camps:
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Investment management, which includes picking the right mix of stocks, bonds and cash.
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Financial planning, which can include everything from budgeting advice to estate planning.
» Read more: What is a financial advisor?
Comprehensive financial planners have traditionally supplied both investment management and planning services, often charging a percentage of the clients assets that they manage. A recent survey of nearly 1,000 financial planners by Inside Information, a trade publication, found that the bigger the portfolio, the lower the percentage clients paid. The median annual charge was 1% for portfolios of $1 million or less, sliding to 0.5% for portfolios of $5 million to $10 million. The survey focused on independent advisors who typically charge fees, rather than brokers or insurance agents who are often paid by commissions.
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Robo-advisors are cheaper but have limits
The investment management part of the equation is whats getting squeezed by robo-advisors, which are automated services that invest according to computer algorithms.
These digital advisors, which include startups Betterment and Wealthfront as well as offerings from Vanguard, Fidelity and Schwab, usually charge about 0.25% of the portfolios value. Some services combine automated investing with access to financial planners. Vanguard Personal Advisor Services, for example, charges 0.3% for investment management plus phone access to a human advisor, while Betterments similar premium service charges 0.4%.
Being able to ask questions isnt the same thing as getting full-on financial planning, however.
A comprehensive planner typically interviews clients to discover their financial goals, how much they owe and own (their balance statement), how much they earn and spend (their cash flow) and what needs to be tweaked to increase the odds of success. Comprehensive planners look at multiple areas of their clients lives, including insurance, taxes, retirement, college savings, employee benefits and estate planning.
If thats what youre getting for your 1%, youre getting a pretty good deal — particularly if the advisor is checking in regularly and helping you handle new problems that pop up.
If all youre getting is investment management, though, youre probably paying too much.
Does your advisor earn his or her keep?
Bob Veres, the Inside Information publisher who conducted the survey and who has tracked the financial planning industry for decades, says any advisor who “merely” provides a well-allocated portfolio and periodic statements is overcharging at anything more than 0.5%. On the other hand, anyone who provides full-service financial planning for less than 1% of assets under management is underpaid, he says.
Most advisors handling portfolios worth less than $1 million charge between 1% and 2% of assets under management, Veres found. That may be a reasonable amount, if clients are getting plenty of financial planning services. But some charge more than 2%, and a handful charge in excess of 4%. Its hard to imagine what might justify those costs.
Advice fees are in addition to whatever the clients pay for the underlying investments, and those investment costs can vary enormously as well. Some exchange-traded funds and index funds charge less than 0.2%, while variable annuities can cost 2% or more. Costs for financial advice matter, because they erode how much money a client can accumulate over time.
When you dont have a ‘portfolio
Even when fees are reasonable, they may not be affordable.
Comprehensive financial planners who charge a percentage of assets under management often require clients to have six- or even seven-figure portfolios. Those who have retainer or planning fees may charge thousands of dollars a year.
If youre not rich or youre just starting out, consider using an automated approach for your investing — either a robo-advisor or a low-cost target date retirement fund that makes the investment decisions for you. When you need real financial planning help, such as deciding how to tap your savings in retirement or which insurance policy to buy, hire a fee-only financial planner who charges by the hour. The advice wont be cheap — figure on $150 an hour or so — but it may be the best deal you can get.
This article was written by NerdWallet and was originally published by The Associated Press.
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