Question: I’m evaluating working with a financial adviser who is offering a 1.6% fee for accounts under $250,000. Is this a fair fee percentage? Most of my research has shown people saying about 1% is normal.
Answer: From a regulatory perspective, it’s usually prohibited to ever charge more than 2%, so it’s common to see fees range from as low as 0.25% all the way up to 2%, says certified financial planner Taylor Jessee at Impact Financial. That said, even though our experts agreed that they’ve never seen an adviser charge the maximum limit of 2%, some planners think 1.6% is egregious. (Looking for a new financial adviser? This tool can match you to an advisor who may meet your needs.)
“Run, don’t walk away. In order to justify your fee, you have to consistently beat the market indexes by 1.6% which is statistically very unlikely,” says certified financial planner Gordon Achtermann at Your Best Path Financial Planning. And always negotiate with a financial adviser (here’s how) on fees.
Others say that 1.6% may be justified, depending on what the adviser does for you. If an adviser is doing investment management only, 1% tends to be the norm, but if they’re including financial planning, 1.6% is not entirely outrageous, some say.
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“Financial and tax planning takes a lot of time and expertise. Unfortunately, I see advisers charge 1.6% just for investment management, where they only meet once a year with the client,” says certified financial planner Mark Struthers at Sona Wealth Advisors.
What you’re paying a financial adviser should depend on what services they’re providing you. “Is that investment management only or does that also include comprehensive financial planning? If it’s the latter, paying anywhere under $3,500 a year is probably a very good deal,” says certified financial planner Chris Diodato at WELLth.(Looking for a new financial adviser? This tool can match you to an advisor who may meet your needs.)
There are a variety of ways you can pay an adviser — a percentage of assets under management (AUM), a flat fee or an hourly fee. In the AUM model, 1% is pretty standard. “AUM is less profitable for smaller clients, so advisers create asset minimums which bar small clients from getting financial guidance. It also tends to overcharge higher net worth individuals when they don’t have a complex financial life,” says Diodato. And sometimes the more assets you have, the less you pay: “Firms like mine charge less and less AUM as the asset size grows. Once our fixed costs are taken care of it becomes cheaper and cheaper to provide financial planning and investment management,” says Struthers.
The cost for a flat fee adviser varies depending on what services a planner is offering, but consumers should expect to pay anywhere from $3,000 to $10,000 annually. Advisers who charge on an hourly schedule tend to cost between $150 per hour and $450 per hour, depending on location and expertise.
The type of adviser you should look for also depends on whether you want to manage your own portfolio. “You can pay for a couple hours of guidance once a year and implement an adviser’s advice, but if you’re not a do-it-yourself person, you can have an adviser manage your portfolio for you for about 1% AUM or less,” says Andy Lawson, certified financial planner at Freshfield Investments.
If you opt for an hourly fee structure, you could pay more than you might anticipate. “Most things will take a lot longer than the client thinks and because the adviser and firm have fixed costs, they most often will have a minimum number of hours per engagement,” says Struthers. Other things to consider under an hourly arrangement are that the adviser cannot follow up with the client to ensure things get done or if their view on an investment or asset class changes, or the tax code has changed. The client has to reach out and by then, it may be too late.
“Clients may be a great fit for an hourly or one-time engagement depending on the complexity of the situation. Oftentimes, greater account values correlate with great complexity,” says Levi Sanchez, certified financial planner at Millennial Wealth. (Looking for a new financial adviser? This tool can match you to an advisor who may meet your needs.)
Some advisers charge separate fees for financial planning and investment management. “Often you will see investment management from 0.50% to 1% and a planning fee from $1,200 to $3,600 per year, depending on complexity,” says Struthers.
If a client’s profile is simple however, it can be cost-effective to have a robo-adviser manage the assets and pay an adviser a flat fee for a comprehensive financial plan. “Let’s assume a client has $100,000 in assets that the adviser is managing, the fee would amount to $1,600 per year and if the adviser is proving employment benefits advice, cash flow planning, budgeting and tax planning to name a few, the fee is well worth it,” says Sanchez.
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